Western Markets has 150,000 shares outstanding with a market price per share of $15.Each share is entitled to one right.If the firm sets a rights offer as 5 rights plus $10 for each new share,what will be the ex-rights price per share?

Question

Quizplus · Accepted Answer

First, we need to calculate the theoretical ex-rights price (TERP) before the rights offering.

TERP = (Total market value of existing shares / Number of existing shares)

Total market value of existing shares = 150,000 x $15 = $2,250,000

Number of existing shares = 150,000

TERP = $2,250,000 / 150,000 = $15

Next, we need to calculate the theoretical value of a right.

Theoretical value of a right = (TERP - Subscription price) / (1+ rights-to-subscription ratio)

Subscription price = $10

Rights-to-subscription ratio = 5:1

Theoretical value of a right = ($15 - $10) / (1+5) = $0.83

Now, we can calculate the ex-rights price per share, which is the TERP minus the theoretical value of a right.

Ex-rights price per share = TERP - Theoretical value of a right = $15 - $0.83 = $14.17

Therefore, the correct answer is B) $14.17.

Western Markets Has 150,000 Shares Outstanding with a Market Price