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.

Question

Quizplus · Accepted Answer

The total number of shares after the rights offering will be 480,000 + (480,000 x 1) = 960,000.

Sue's current ownership percentage is: (42,000/480,000) x 100% = 8.75%.

If Sue opts to sell her rights, she will receive:

(42,000/480,000) x (480,000 x 24) = $2,100,000

This means she will receive 2,100,000/24 = 87,500 rights.

The total number of shares after all rights are exercised will be:

480,000 + 87,500 = 567,500

Sue will not exercise her rights, so her ownership position will remain the same at 42,000/567,500 = 7.41%.

Therefore, the correct answer is B) 6.94 percent, which is the closest to Sue's new ownership position.

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