Question

Miller Fruit wants to expand its citrus grove operations. The firm estimates that it needs $8.6 million to buy land and establish its operations. Currently, the firm has 540,000 shares of stock outstanding at a market price per share of $47.50. If the firm decides to raise the needed capital through a rights offering, one right will be issued for each share of stock. The subscription price will be set at $40 a share. How many rights will a shareholder need to purchase one new share of stock in this offering

Answer 1

Answer: 2.51

Explanation:

First, we calculate the number of shares that will be issued in order to raise $8.6 million at $40 a share. This will be:

= $8.6 million / $40

= 215,000

Since the firm currently has 540,000 shares of stock outstanding, the number of rights that a shareholder will need to purchase one new share of stock in this offering will be:

= 540,000 / 215,000

= 2.51