A rights issue offers the firm's shareholders one new share of stock at $40 for every three shares of stock they currently own.What should be the stock price after the rights issue if the stock sells for $80 per share before the issue?

Question

Quizplus · Accepted Answer

Before the rights issue, the shareholder owned 3 shares worth $240 ($80 per share). After the rights issue, the shareholder will own 4 shares (3 original and 1 from the rights issue) for a total cost of $160 ($40 for the rights issue share and $80 for the 3 original shares). The new market capitalization for the firm will be the number of shares outstanding multiplied by the stock price after the issue. 
New market cap = 4 x Stock price after issue
$640 = 4 x Stock price after issue
Stock price after issue = $160
Therefore, the stock price after the rights issue is $70 (($80 + $40)/2) per share.

A Rights Issue Offers the Firm's Shareholders One New Share