Question

Solo Inc. is proposing a rights offering. Presently there are 200,000 shares outstanding at $80 each. Two rights will be required to buy one new share for a subscription price of $50. What will be the ex-rights price (the price after the offering is complete)?

Answer 1

Solution:

The formula for calculating the ex-rights price is

P1 = [ ( P0 * NE ) + (PS *NR) ] / (NE + NR )

Where

P1 = Ex-rights price

P0 = Market price before rights issue

PS = Rights subscription price        

NE = Number of existing shares for every Right share          

NR =Number of new shares                       

As per the information given in the question we have

P0 = Market price before rights issue = $ 80

PS = Rights subscription price = $ 50

NE = Number of existing shares for every Right share = 2 shares

NR = Number of new shares = 1 share

Applying the above values in the formula we have the ex - rights price as

= [ ( $ 80 * 2 ) + ( $ 50 * 1 ) ] / ( 2 + 1 )

= [ $ 160 + $ 50 ] / 3

= $ 210 / 3

= $ 70

Thus the ex - rights price is = $ 70