The Coatesville Company has decided to sell additional common stock through a rights offering. The company has 12 million shares outstanding and plans to sell an additional 1.5 million shares through a rights offering. Each shareholder will receive one right for each share currently held, and thus each right will entitle shareholders to purchase 0.125 shares. The Coatesville common stock is currently selling at $50 per share, and the subscription price of the rights will be $45 per share. Determine the theoretical value of the right for the rights on case.

Question

Quizplus · Accepted Answer

To determine the theoretical value of the right, we can use the formula:

Theoretical Value of Right = (Current Stock Price - Subscription Price) / (Number of Rights Required to Purchase One Share + 1)

Plugging in the given values, we get:

Theoretical Value of Right = ($50 - $45) / (1/0.125 + 1)
Theoretical Value of Right = $5 / 9
Theoretical Value of Right = $0.556 (rounded to the nearest cent)

Therefore, the best choice is A) $0.556.

The Coatesville Company Has Decided to Sell Additional Common Stock