Suppose you own 50,000 shares of common stock in a firm with 2.5 million total shares...

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Suppose you own 50,000 shares of common stock in a firm with 2.5million total shares outstanding. The firm announces a plan to sellan additional 1 million shares through a rights offering. Themarket value of the stock is $35 before the rights offering and thenew shares are being offered to existing shareholders at a $5discount. (LG 8-3)
    If you exercise your preemptive rights, howmany of the new shares can you purchase?
    What is the market value of the stock afterthe rights offering?
    What is your total investment in the firmafter the rights offering? How is your investment split betweenoriginal shares and new shares?
    If you decide not to exercise your preemptiverights, what is your investment in the firm after the rightsoffering? How is this split between old shares and rights?

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3.9 Ratings (441 Votes)

a Right shares will be generally offered in the proportion of your holding Proportion of our shareholding 500002500000002 ie 2 No of shares offered under rights issue 1 Million Noof shares See Answer

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Suppose you own 50,000 shares of common stock in a firm with 2.5million total shares outstanding. The firm announces a plan to sellan additional 1 million shares through a rights offering. Themarket value of the stock is $35 before the rights offering and thenew shares are being offered to existing shareholders at a $5discount. (LG 8-3) If you exercise your preemptive rights, howmany of the new shares can you purchase? What is the market value of the stock afterthe rights offering? What is your total investment in the firmafter the rights offering? How is your investment split betweenoriginal shares and new shares? If you decide not to exercise your preemptiverights, what is your investment in the firm after the rightsoffering? How is this split between old shares and rights?