Prahm Corp. wants to raise $3 million via a rights offering. The company current

Question

Prahm Corp. wants to raise $3 million via a rights offering. The company currently has 400,000 shares of common stock outstanding that sell for $40 per share. Its underwriter has set a subscription price of $20 per share and will charge the company a spread of 4 percent. If you currently own 5,000 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? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Money required 3000000 No of share to be issued Subscribtion price 20 Less Undewrting comission 4% $                 0.80 Net proceeds per share $               19.20 No of share to be issued =3000000/19.20 156250 No right share per share =400000/156250 2.56 P X = [NP RO + P S ]/(N + 1) =((2.56*40)+20)/(2.56+1) 34.38 So, the value of a right is:40-34.38 5.62 proceeds from sale of right is 5000*5.62 28100

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