Mountain Products has decided to raise $6 million via a rights offering. The company will issue one right for each share of stock outstanding. The subscription price is set at $20 per share. The current market price of the stock is $25.20 and there are 1,500,000 shares currently outstanding. What is the value of one right?

Question

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The value of one right can be calculated using the formula: $\text{Value of one right} = \frac{\text{Current market price} - \text{Subscription price}}{\text{Number of rights needed to buy one share} + 1}$. Given the current market price is $25.20 and the subscription price is $20, and since one right is issued for each share outstanding, it takes 1 right to buy a new share at the subscription price. Therefore, the calculation is $\frac{25.20 - 20}{1 + 1} = \frac{5.20}{2} = 2.60$. However, this calculation seems incorrect based on the provided options, indicating a mistake in my explanation. The correct approach to find the value of one right before the ex-rights date (when the stock price has not adjusted for the rights offering) is to calculate the theoretical ex-rights price (TERP) and then determine the value of a right based on the difference between the market price and the TERP.The correct calculation is as follows:1. Calculate the total number of shares after the rights offering: Since $6 million is being raised at $20 per share, the number of new shares = $6,000,000 / $20 = 300,000 shares.2. Calculate the total number of shares after the offering: 1,500,000 (existing) + 300,000 (new) = 1,800,000 shares.3. Calculate the total value of the company based on the current market price before the offering: 1,500,000 shares * $25.20 = $37,800,000.4. Add the money raised from the offering to the total value: $37,800,000 + $6,000,000 = $43,800,000.5. Calculate the TERP: $43,800,000 / 1,800,000 shares = $24.33 per share.6. Calculate the value of one right: $25.20 (current market price) - $24.33 (TERP) = $0.87.Therefore, the correct value of one right is $0.87, which matches option B. My initial calculation was incorrect, and the correct approach involves calculating the TERP and then finding the difference between the market price and the TERP to find the value of a right.

Mountain Products Has Decided to Raise $6 Million Via a Rights