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Rights issue

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A company's stock currently sells for $45 per share. Last week the firm issued rights to raise new equity. To purchase a new share, a stockholder must remit $10 and three rights.

a. What is the ex-rights stock price?
b. What is the price of one right?
c. When will the price drop occur? Why will it occur?

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A company's stock currently sells for $45 per share...last week the firm issued rights to raise new equity...to purchase a new share, a stockholder must remit $10 and three rights...

a. What is the ex-rights stock price?

Rights ...

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  • Ex-rights price = (Market value of shares prior to rights issue + fund raised from rights issue)/(no. of shares after rights issue) No. of shares after rights issue = 120000*(1 +1/20) = 126,000 Market value of shares prior to rights issue = 120000*8.10

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    Number of shares after the rights issue = 7,000,000 Price per share after the rights issue = 330,000,000/7,000,000 = 47.14 Value of 1 right = 50-47.14 = $2.86 The solution explains how to calculate the value of a right using stock trading and share

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