Harmon Candy Co. has announced a rights offering for its shareholders. Cindy Bar

Question

Harmon Candy Co. has announced a rights offering for its shareholders. Cindy Barr owns 500 shares of Harmon Candy Co. stock. Five rights plus $62 cash are needed to buy one of the new shares. The stock is currently selling for $70 rights on.

a. What is the value of a right?

b. How many of the new shares could Cindy buy if she exercised all of her rights ? How much cash would this require?

c. Cindy doesn't know if she wants to exercise her rights or sell them. What alternative would have the most beneficial effect on her wealth?

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Explanation / Answer

(Stock Price - Rights subscription price per share) / no of rights required to buy one share + 1

=70-62/5+1

=8/6

=$1.33 per right

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b)

Cindy Barr owns 500 shares

hence she will receive 500 rights.

=500 rights/5 rights per share = 100 shares.

100 shares × $62 price = $6,200 required

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c)

Not exercising the right nor selling them would have any effect on the cyndy’s wealth

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