P15-14 Selling Rights [LO4] Roth Corp. wants to raise $3.3 million via a rights

Question

P15-14 Selling Rights [LO4] Roth Corp. wants to raise $3.3 million via a rights offering. The company currently has 500,000 shares of common stock outstanding that sell for $25 per share. Its underwriter has set a subscription price of $17 per share and will charge the company a 6 percent spread. If you currently own 4,500 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 $10,067.80 O $10,943.49 $11,048.72 $10,101.68 $10,522.59

Explanation / Answer

Solution: Answer is 5th option $10,522.59 Working Notes: Required sales proceeds = Amount raised /(1- Spread of Underwriters) =3,300,000/(1-0.06) =3,300,000/0.94 =3,510,638.29787 No. of shares must be sold to raise the desired funds = Required sales proceeds / Subscription price =3,510,638.29787/$17 =206,508.135169 Number of rights needed   = No of old shares / No of new shares to be issued =500,000/206,508.135169 = 2.4212121 shares 2.421212 shares required to have 1 right Stock ex-rights = [n x ROP + SP] /(n+1) n= no. of Rights required to buy a Right share= 2.421212 ROP = Right on price or Cum-Right price = $25 SP = Subscription price = $17 Stock ex-rights = [n x ROP + SP] /(n+1) =[2.421212 x 25 + 17 ] /(2.4212121 +1) =[77.5303]/3.421212 =22.66164739   Value of a right = ROP - Ex Right price ROP = Right on price or Cum-Right price = $25 Ex-rights price                =$22.66164739   Value of a right = ROP - Ex Right price = $25 - $22.66164739 =$2.33835261 By selling rights we can get = No of shares holding x Value of a right =4500 x 2.33835261 =$10,522.58675 =$10,522.59 Please feel free to ask if anything about above solution in comment section of the question.

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