Question

WUV Ltd. wants to raise $3.29 million via a rights offering. The company currently has 420,000 shares of common stock outstanding that sell for $30 per share. Its underwriter has set a subscription price of $25 per share and will charge WUV a 6% spread. If you currently own 6,000 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

The net proceeds to the company on a per share basis is the subscription price times one minus the underwriter spread, so:

Net proceeds to the company = $25(1 - 0.06) = $23.50 per share

So, to raise the required funds, the company must sell:

New shares offered = $3,290,000/$23.50 = 140,000

The number of rights needed per share is the current number of shares outstanding divided by the new shares offered, or:

Number of rights needed = 420,000 old shares/140,000 new shares = 3.00 rights per share

The ex-rights stock price will be:

PX = [NP_RO + P_S]/(N + 1)

= [3.00($30) + $25]/4.00 = $115 / 4 = $28.75

So, the value of a right is:

Value of a right = $30 - $28.75 = $1.25

And your proceeds from selling your rights will be:

Proceeds from selling rights = 6,000($1.25) = $7,500