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Rights issue

The Harmon Candy Co. has announced a rights offering for its shareholders.
Cindy Barr owns 500 shares of Harmon Candy Co. stock. Five rights plus \$62 cash are needed to buy one of the new shares. The stock is currently selling for \$70 rights-on.

a. What is the value of a right?
b. How many of the new shares could Cindy buy if she exercised her rights? How much cash would this require?
c. Cindy does not know if she wants to exercise rights or sell them. What alternative would have the most beneficial effect on her wealth?

Solution Preview

a. What is the value of a right?

Value of one right = (Market value of stock, rights on - Subscription price)/(Number of rights required to buy a new share + 1)
Value of one right = (70-62)/(5+1) = \$1.33

b. How many of the new shares could Cindy buy if she exercised her rights? How much cash would this require?

Number ...

Solution Summary

The solution explains various calculations relating to a rights issue

\$2.19