Question

Mountain Products has decided to raise $6 million via a rights offering. The company will issue one right for each share of stock outstanding. The subscription price is set at $20 per share. The current market price of the stock is $25.20 and there are 1,500,000 shares currently outstanding. What is the value of one right?

Answer 1

Answer:

 Value of  one right   = $2.63

Explanation:

A right issue is the issue of additional new shares to existing shareholders in proportion to their existing shareholdings at a price less than the current market price.

The value of rights is the difference between the theoretical ex-right price and the right price .

Value of rights= Theoretical ex-right price - Right price

The theoretical ex-right price is the price at which a share is expected to settle after the right issue assuming all the rights are taken

Theoretical ex-rights price = Total value of shares after right issue/Number of shares after right issues

1 unit  of old share       at   $25.25 =  $25.25

I unit of right share   at       $20.00= $20.00

Total value of 2 shares                     $ 45.25

Theoretical ex-rights price  = 45.25/2 =$22.63

Theoretical ex-rights price=$22.63

Value of rights= Theoretical ex-right price - Right price

                       =  22.63 - 20.00

 Value of  one right   = $2.63