P15-14 Selling Rights [LO4] Roth Corp. wants to raise $5.2 million via a rights

Question

P15-14 Selling Rights [LO4] Roth Corp. wants to raise $5.2 million via a rights offering. The company currently has 450,000 shares of common stock outstanding that sell for $40 per share. Its underwriter has set a subscription price of $29 per share and will charge the company a 5 percent spread. If you currently own 8,400 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 your intermediate calculations.) O $26,21172 O $26,32767 O $28,669.07 O $27,303.88 O $28,396.03

Explanation / Answer

The Answer is “$27,303.88 “

- Net Proceeds = $29 x [1 – 0.05] = $27.55 per share

- New shares offered = $52,00,000 / $27.55 = 188,748 Shares

- Number of rights needed = 450,000 Shares / 188,748 Shares = 2.384134615

- The ex-rights stock price will be ;

= [ (2.384134615 x $40 ) + $29 ] / (2.384134615 + 1) = $36.74954

- So , the value of a right = $40 – 36.74954 = $3.250462 per share

Therefore , proceeds from selling the rights will be ;

= 8,400 Shares x $3.250462 per share

= $27,303.88

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