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Rights issue

4) The Riley Corporation currently has 100,000 shares outstanding that are selling at $50 per share. It needs to raise $900,000. Net income after taxes is $500,000. Its vice president of finance and its investment banker have decided on a rights offering, but are not sure how much to discount the subscription price from the current market value. Discounts of 10%, 20%, and 40% have been suggested. Common stock is the sole means of financing for the Riley Corp.

4a. For each discount, determine the subscription price, the number of shares to be issued, and the number of rights required to purchase one share. (round to one place after the decimal point if necessary)
4b. Determine the value of one right under each of the various discount rates?(round to two places after decimal)

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Please see attached file where formatting has been conserved

4) The Riley Corporation currently has 100,000 shares outstanding that are selling at $50 per share. It needs to raise $900,000. Net income after taxes is $500,000. Its vice president of finance and its investment banker have decided on a rights offering, but are not sure how much to discount the subscription price from the current market value. Discounts of 10%, 20%, and 40% have been suggested. Common stock is the sole means of financing for the Riley Corp.

4a. For each discount, determine the subscription price, the number of shares to be issued, and the number of rights required to purchase one share. (round to one place after the decimal point if necessary)

4b. Determine the value of one right under each of the various discount rates?(round to two places after decimal)

No of existing shares 100,000
Market price per share= $50
Therefore, market capitalization= $5,000,000 =100,000x$50.

Amount to be raised= $900,000
Net income after taxes which can be retained= $500,000
Therefore net amount to be raised= $400,000

1) Discount= 10%
Market price per share= $50
Discount= 10%
4a Therefore, Subscription Price of ...

Solution Summary

The solution provides answers to questions on a Rights issue. It calculates the subscription price, the number of shares to be issued and the value of one right.

$2.19