Roth Corp. wants to raise $4.6 million via a rights offering. The company curren
ID: 2633419 • Letter: R
Question
Roth Corp. wants to raise $4.6 million via a rights offering. The company currently has 560,000 shares of common stock outstanding that sell for $70 per share. Its underwriter has set a subscription price of $40 per share and will charge the company a spread of 2 percent.
If you currently own 2,500 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 intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Roth Corp. wants to raise $4.6 million via a rights offering. The company currently has 560,000 shares of common stock outstanding that sell for $70 per share. Its underwriter has set a subscription price of $40 per share and will charge the company a spread of 2 percent.
Explanation / Answer
For each share issued, the company would pay a spread of 2%
Thus the new number of shares issued = Amount raised / (Subscription price * (1 + spread)) = 4.6 / (40* 1.02) = 112745 shares
Under the rights issue, each share would receive = 112745 / 560000 = 0.20 shares
New price of share after issue = (70 * 560,000 + 4600000) / (560,000 + 112745) = 65.11
If you own 2500 shares, your rights would be worth = Number of shares you own * Number of shares you would receive under rights issue against each share * (Share price after issue - Price of each share) = 2500 * 0.20 * (65.11 - 40) = $12555
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