In-class exercise

1
In-class exercise

• Instructions
• Please hand in your answer to the following
  question. You must work independently and show
  your process. The answer will be posted on the
  course website.
• Firm ABC just had a rights offering. Before the
  rights offering, its stock was trading at 12 per
  share with total number of shares outstanding of
  2 million. 2 rights are needed to buy a share.
  The ex-right stock price is 10. Assuming all
  rights are exercised, how much money did the firm
  raise through the rights offering?

2
Solution

• Two ways
• New firm value new stock price new s.o. 10
  (2m 2m/2) 30 m
• old firm vlaue 212 24m
• financing 30-24 6m
• b. More mathematical way (and less intuitive)
• New stock price old price value of right
• Right value 12-10 2 (12-sub. price)/(21)
• Sub. Price 6
• Financing Subscription price new shares
  61m 6m