You decide to raise $2 million in additional funding via a rights offering. Every shareholder will receive one right for every share of stock they own. The offering consists of a total of 250,000 new shares. The current market price of your stock is $10. Currently, there are 1 million shares outstanding. What is the value of one right?

Question

Quizplus · Accepted Answer

The value of one right can be calculated using the formula: $$ \text{Value of one right} = \frac{\text{Market price} - \text{Subscription price}}{\text{Number of rights needed to buy one new share} + 1} $$ First, find the subscription price per new share: $$ \text{Subscription price} = \frac{\text{Total funds to be raised}}{\text{Number of new shares}} = \frac{2,000,000}{250,000} = $8 $$ Then, calculate the number of rights needed to buy one new share: $$ \text{Number of rights needed} = \frac{\text{Current outstanding shares}}{\text{New shares}} = \frac{1,000,000}{250,000} = 4 $$ Now, plug these values into the formula: $$ \text{Value of one right} = \frac{10 - 8}{4 + 1} = \frac{2}{5} = $0.40 $$

You Decide to Raise $2 Million in Additional Funding Via