Silverman Ltd. has five million common shares outstanding at $24.00 a share. The Board of Directors has authorized a one-for-three rights issue at $20 per share. What is the ex-rights price?

Question

Quizplus · Accepted Answer

A one-for-three rights issue means that shareholders can purchase one new share for every three shares they already own.

In this case, there are five million shares outstanding, so the total number of new shares being issued is (5 million / 3) = 1.67 million.

To calculate the ex-rights price, we need to take into account the price of the new shares and the number of shares outstanding after the issue.

The total amount raised by the rights issue is (1.67 million x $20 per share) = $33.4 million.

The total number of shares outstanding after the issue is (5 million + 1.67 million) = 6.67 million.

To find the ex-rights price, we divide the total value of the company by the number of shares outstanding:

($24 x 5 million) + ($20 x 1.67 million) / 6.67 million = $23.

Therefore, the ex-rights price is $23.