The Sedgewick Company has 480,000 shares of common stock outstanding. Sue owns 42,000 of those shares. The company has just announced a rights offering with a subscription price of $24. One right is being granted for every share currently outstanding. This offering will provide $3 million of new financing for the firm, ignoring all issue costs. What will Sue's new ownership position be if she opts to sell her rights rather than exercise them? Assume that all rights are exercised.

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First, calculate the number of new shares to be issued using the $3 million of new financing and the $24 subscription price: $3,000,000 / $24 = 125,000 new shares. The total number of shares after the rights offering will be 480,000 (existing shares) + 125,000 (new shares) = 605,000 shares. Sue owns 42,000 shares, so her new ownership percentage if she sells her rights and does not buy any new shares will be (42,000 / 605,000) * 100% = 6.94%.

The Sedgewick Company Has 480,000 Shares of Common Stock Outstanding