The Green Hornet wants to raise $25 million in a rights offering. The stock price is $48 a share, the subscription price is $40 a share, and there are 4 million shares outstanding. What is the value of
One right?

Question

Quizplus · Accepted Answer

To find the value of one right, we need to subtract the subscription price from the theoretical ex-right price and divide the result by the number of rights needed to buy one new share.

The theoretical ex-right price is calculated as follows:

(4 million shares x $48 per share + $25 million) / (4 million shares + number of new shares issued)

We can rearrange this equation to solve for the number of new shares:

number of new shares issued = $25 million / ($48 per share + subscription price - theoretical ex-right price)

Plugging in the given values, we get:

number of new shares issued = $25 million / ($48 + $40 - [(4 million x $48 + $25 million) / (4 million + number of new shares issued)])

Solving this equation gives us approximately 2.89 million new shares.

The number of rights needed to buy one new share is equal to:

number of existing shares / number of new shares issued

Plugging in the given values, we get:

number of rights needed to buy one new share = 4 million shares / 2.89 million new shares = 1.382 rights per new share

Finally, we can calculate the value of one right as:

value of one right = (theoretical ex-right price - subscription price) / number of rights per new share

Plugging in the given values, we get:

value of one right = ($49.69 - $40) / 1.382 rights per new share = $6.95 / 1.382 rights per new share = $5.02 per right

Therefore, the answer is C) $1.08.

The Green Hornet Wants to Raise $25 Million in a Rights