Question

The Wordsmith Corporation has 40,000 shares outstanding with a market price of $25 each. The firms expects to raise $200,000 via a rights offering at a subscription price of $20. How many rights must be submitted to acquire one new share

Answer 1

Answer:

4 rights will be submitted to obtain 1 share

Explanation:

Shares are issued by companies to raise capital for their operations. Outstanding shares are those that have been given out already and on which the company is obligated to pay dividends.

Wordsmith corporation wants to raise $200,000 from new shares at $20 each. They had 40,000 shares outstanding initially.

Number of new shares= 200,000/20= 10,000

Therefore

Number of rights that is needed on existing shares= 40,000/10,000= 4

Answer 2

Answer:

Five Rights for one new share

Explanation:

Oustanding Shares  40000  

   

Market Price  25  

   

Investment required  200000  

   

Market Price         200000 25 8000

Exercise Price 200000 20 10000

Benefit                           2000

                                  20%

Five Rights for one new share