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Rights: Ex-right, Value of a right and subscription price.

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Rights: Summit Corp.'s stock is currently selling at $13 per share. There are 1 million shares outstanding. The firm is planning to raise $2 million to finance a new project. What are the ex-rights stock price, the value of a right, and the appropriate subscription prices under the following scenarios?

a. Two shares of outstanding stock are entitled to purchase one additional share of the new issue.
b. Four shares of outstanding stock are entitled to purchase one additional share of the new issue.
c. How does the stockholders' wealth change from part (a) to part (b)?

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Solution Preview

a. Two shares of outstanding stock are entitled to purchase one additional share of the new issue.

One new share requires two rights and there are one million shares outstanding which means 1 million rights.
=> 1 million / 2 = 500,000 new shares will be issued.
The funds needed are $2 million
=> each new share will have a subscription price 2 ...

Solution Summary

Ex-right, value of a right and subscription price is analyzed for Summit Corp.'s stock. Changing stockholder's wealth is examined.

$2.19
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New stock issue, subscription price and value of one right

Gold Mining Corporation is seeking to raise $10,000,000 through a rights offering. The company presently has 1,000,000 shares of common stock outstanding at a current market price of $25 per share.

(a) How many new shares must be sold via the rights offering if the subscription price of the new stock is $20 per share?

(b) How many new shares could a stockholder owing 100 shares purchase?

(c) What is the value of one right?

(d) What will be the approximate price of the stock ex-rights?

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