Question

Prahm Corp. wants to raise $5.1 million via a rights offering. The company currently has 570,000 shares of common stock outstanding that sell for $52 per share. Its underwriter has set a subscription price of $27 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

A | 5100000 27 6% Amount to be borrowed Subscription Price Spread Share Price before rights Current shares outstanding Shares owned 52 570000 5000 Step 1 Calculate the Net Proceed per share Net Proceed per share 25.38 16 Step 2 Calculate the Number of shares to be issued Shares issued 200945.63 22 Step 3 Calculate the 'Rights Ratio Rights ratio 2.84 Step 4 Calculate the Share Price after rights Share Price after rights $45.483794 Step 5 Calculate the 'Value of a Right' Value of a right $6.5162062 Step 6 Calculate the Sale Proceeds from sale of rights Sale Proceeds $32,581.03

A Formula Sheet Amount to be borrowed Subscription Price Spread Share Price before rights Current shares outstanding Shares owned 5100000 27 0.06 52 570000 5000 Step 1 Calculate the Net Proceed per share Net Proceed per share =J3*(1-J4) Step 2 Calculate the Number of shares to be issued Shares issued =J2/J12 Step 3 Calculate the 'Rights Ratio' Rights ratio =J6/J18 Step 4 Calculate the Share Price after rights Share Price after rights =((J3)+(J24*J5))/(1+J24) Step 5 Calculate the 'Value of a Right' Value of a right right =J5-J30 Step 6 Calculate the Sale Proceeds from sale of rights Sale Proceeds =J7*J36