Question

Knoll Consulting wants to raise $20,000,000 to expand their operations. The company is going to issue 250,000 new shares through a rights offering with a subscription price of $80.00. Knoll currently has 500,000 shares outstanding at a price of $130.00 per share. What will the new market value of the company be? How many rights will be needed to buy one new share? What will the ex-rights price be? What is the value of a right?

Answer 1

a.

New Market value = (500,000 × $130) + (250,000 + $80)

= $65,000,000 + $20,000,000

= $85,000,000

New Market value is $85,000,000.

b.

Existing share outstanding = 500,000

New share issue = 250,000

Number of right required for buy one share = 500,000 / 250,000

= 2

2 right required to buy one share.

c.

Ex right price = $85,000,000 / (500,000 + 250,000)

= $85,000,000 / 750,000

= $113.33

Ex right price is $113.33.

d.

Value of right = ($130 - $80) / 2

= $50 / 2

= $25

Value of right is $25.