A Hamilton firm has 800,000 shares outstanding at a market price of $120 a share. It wants to raise $16 million via a rights offering. The subscription price is $100 per share. What is the value of a right?

Question

Quizplus · Accepted Answer

The value of a right can be calculated using the formula: $$ \text{Value of a right} = \frac{\text{Market price} - \text{Subscription price}}{\text{Number of rights needed to buy a new share} + 1} $$First, calculate the number of new shares to be issued: $$ \text{New shares} = \frac{\text{Amount to be raised}}{\text{Subscription price}} = \frac{16,000,000}{100} = 160,000 $$Next, calculate the number of rights needed to buy a new share: $$ \text{Number of rights needed} = \frac{\text{Old shares}}{\text{New shares}} = \frac{800,000}{160,000} = 5 $$Finally, calculate the value of a right: $$ \text{Value of a right} = \frac{120 - 100}{5 + 1} = \frac{20}{6} = 3.33 $$Therefore, the value of a right is $3.33.

A Hamilton Firm Has 800,000 Shares Outstanding at a Market