Question

Selling Rights [LO4] Prahm Corp. wants to raise $5.5 million via a rights offering. The company currently has 580,000 shares of common stock outstanding that sell for $45 per share. Its underwriter has set a subscription price of $20 per share and will charge the company a spread of 6 percent. If you currently own 5,000 shares of stock in the company and decide not to participate in the rights offering, how much money can you get by selling your rights?

Answer 1

Rights Offerings

Rights offerings refer to the issue of common stock to the existing shareholders of a company as their preemptive right or as per the decision taken by the company. Such offer to the existing shareholders, are also simply known as “offer” or even privileged subscription. Such offers are allowed for a specified number of shares with specified amount within specified time limit, after which it is treated as expired.

Here in this case, Company P wishes to raise $5.5 million via rights offerings with the subscription price of $20 per share. As the issue is managed by the underwriters, they charge the company a spread of 6 percent.

Hence, calculate the net proceeds per share that the company will get after the underwriters’ charge as follows:

Now, compute the number of shares Company P must sale with the net proceeds of $18.80 per share to raise an amount of $5,500,000, as follows:

With the number of shares of right offerings determined as above, calculate the number of rights needed for the current outstanding shares as follows:

Now, compute the ex-rights stock price of Company P as follows:

Calculate the value of right as follows:

Now, compute the amount one can get if he/she currently has 5,000 shares outstanding as follows:

Therefore, a person with 5,000 current outstanding shares can get cash of