Roth Corp. wants to raise $4.0 million via a rights offering. The company curren
ID: 2634939 • Letter: R
Question
Roth Corp. wants to raise $4.0 million via a rights offering. The company currently has 500,000 shares of common stock outstanding that sell for $36 per share. Its underwriter has set a subscription price of $25 per share and will charge the company a spread of 4 percent.
If you currently own 4,000 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?
Roth Corp. wants to raise $4.0 million via a rights offering. The company currently has 500,000 shares of common stock outstanding that sell for $36 per share. Its underwriter has set a subscription price of $25 per share and will charge the company a spread of 4 percent.
Explanation / Answer
Soln:
This is a 1 to 8 rights issue i.e (500,000 old shares : 4 million new shares)
This means we are offered to buy 32,000 shares at a price of $ 25
If the rights are sold then the difference will be ($ 36 - $ 25) =$ 11. This would be the cost of having right to buy one share of Roth corp.
So by selling the rights the money made will be = 32,000 X 11= $ 352,000
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