Question

Prahm Corp. wants to raise $4.7 million via a rights offering. The company currently has 530,000 shares of common stock outstanding that sell for $48 per share. Its underwriter has set a subscription price of $23 per share and will charge the company a spread of 5 percent. If you currently own 6,000 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.)

Answer 1

Answer:

The correct answer to the following question will be "$43,303.34". The further explanation is given below.

Explanation:

The given value is:

Subscription price = $23 per share

Now,

First measure Net earnings per share

= $Subscription \ price \ per \ share\times (1-Spread)$

On putting the values in the above expression, we get

= $23\times ( 1-0.05 )$

= $21.85 \ per \ share$

Current shares on sale = $215,103\times (\frac{4,700,000}{21.85})$

Amount of rights required = $2.463935881879\times (\frac{530,000}{215,103})$

Share price would be ex-right:

=$[ ( Number \ of \ rights \ needed\times selling \ price \ per \ share) + Subscription \ price ] + [ Number \ of \ rights \ needed + 1]$

On putting the values in the above formula, we get

= $\frac{( 2.463935881879\times 48) + 23}{2.463935881879 + 1}$

= $\frac{118.2689223302 + 23}{3.463935881879}$

= $$40.78277634099 \ per \ share$            

As we know,

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

= $48-40.78277634099$

= $$7.21722365900 \ per \ share$

And the proceeds from the right to sell would be:

Number of shares × Value of a right  

= $6000\times 7.21722365900$

= $$43,303.34$