Suppose that the company was also considering structuring the rights issue to allow for an additional share to be purchased for 10 rights at a subscription price of $3. Prove that a stockholder with 100 shares would be indifferent between purchasing a new share for 10 rights at $3 or purchasing a new share for 20 rights at $6.
Back ground information:
Question 1: Jelly Beans, Inc., is proposing a rights offering. There are 100,000 outstanding shares at $25 each. There will be 10,000 new shares issued at a $20 subscription price.
a. What is the value of a right?
Value of a right = difference between the old share price and the new share price = $25.00 - $24.55 = $.4545 or $.45
b. What is the ex-rights price?
Ex-rights price = ($25 X100,000) + ($20 X 10,000)
110,000 (total shares)
= $2,500,000 + $200,000 = $24.5454... or $24.55
110,000
c. What is the new market value of the company?
The market value is the number of shares times the market price.
110,000 X $24.5454... = $2,699,994 or $2,700,000
d. Why might a company have a rights offering rather than a common stock offering?
Offering rights rather than common stock will reduce issuance costs and they also offer shareholders more flexibility. They can be exercised or sold.
Question 2. Suppose that the company was also considering structuring the rights issue to allow for an additional share to be purchased for 10 rights at a subscription price of $3. Prove that a stockholder with 100 shares would be indifferent between purchasing a new share for 10 rights at $3 or purchasing a new share for 20 rights at $6.