Question

Prahm Corp. wants to raise $4 million via a rights offering. The company currently has 460,000 shares of common stock outstanding that sell for $41 per share. Its underwriter has set a subscription price of $16 per share and will charge the company a spread of 6 percent. If you currently own 4,000 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? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Your proceeds from sale of rights

Answer 1

Proceeds from the sale of rights

- Net Proceeds per share = Subscription price per share x (1 – Spread)

= $16 per share x (1 – 0.06)

= $16 per share x 0.94

= $15.04 per share

- New shares offered = 265,957 Shares [$40,00,000 / $15.04 per share]

- Number of rights needed = 1.729600 [460,000 Shares / 265,957 Shares]

- The Ex-rights stock price will be

Ex-rights stock price = [(Number of rights needed x selling price per share) + Subscription price] + [Number of rights needed + 1]

= [(1.729600 x $41 per share) + $16 per share] / [1.729600 + 1]

= [$70.9136 + $16] / 2.729600

= $31.841149 per share

- So, the value of a right = Selling price per share - Ex-rights stock price

= $41 per share - $31.841149 per share

= $9.158851 per share

Therefore, proceeds from selling the rights will be

= Number of shares x value of a right

= 4,000 Shares x $9.158851 per share

= $36,635.40

“Hence, the Proceeds from sale of rights will be $36,635.40”