Valiant Industries has 20 million shares outstanding at a price of $28 per share. The company wishes to raise more money and plans to do so through a rights issue. Every existing shareholder will receive one right for each share held. For every four rights held by the shareholder, they can buy one share at a price of $28. If all rights are exercised, how much money will be raised in this offer?

Question

Quizplus · Accepted Answer

There are currently 20 million shares outstanding, and every shareholder will receive one right for each share held. Therefore, there will be 20 million rights issued. For every four rights held by the shareholder, they can buy one share at a price of $28. So, each share can be sold for $28 x (4/1) = $112. 
If all rights are exercised, then the total new shares issued will be (20 million x 1) / 4 = 5 million new shares. Therefore, the total amount of money raised will be 5 million shares x $112 per share = $560 million. However, we need to keep in mind that only 1 out of every 4 rights will be exercised, so the total amount of money raised will be $560 million x (1/4) = $140 million. Hence, the correct answer is option D.

Valiant Industries Has 20 Million Shares Outstanding at a Price