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    Impact of a Rights Offering

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    Jensen Company plans to raise $10,000,000 in new equity by means of a rights offering with a subscription price of $80 per share. The stock currently sells for $100 per share and there are 1 million shares outstanding.

    1. How many new shares will Jensen issue?
    2. How many rights will be required to buy one share?
    3. At what price will the stock sell when it goes "ex rights" if the total value of all stock increases by the amount of the new funds?
    4. What is the theoretical value of one right?

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    Solution Preview

    When a firm undertakes a rights offering, each shareholder receives one right for each share held.

    1. To raise $10,000,000 at $80 per share, the firm must issue $10,000,000/$80 = 125,000 shares.

    2. The firm will issue 1,000,000 rights (one ...

    Solution Summary

    This solution analyzes the impact of a rights offering: shares issued, rights required per share, value of each right and value of stock after the rights offering.