Holooly Plus Logo
Holooly Plus Logo

Question 15.2: The Lagrange Point Co. has proposed a rights offering. The s...

The Lagrange Point Co. has proposed a rights offering. The stock currently sells for $40 per share. Under the terms of the offer, stockholders will be allowed to buy one new share for every five that they own at a price of $25 per share. What is the value of a right? What is the ex-rights price?

The blue check mark means that this solution has been answered and checked by an expert. This guarantees that the final answer is accurate.
Learn more on how we answer questions.

You can buy five rights-on shares for 5 × $40 = $200 and then exercise the rights for another $25. Your total investment is $225, and you end up with six ex-rights shares. The ex-rights price per share is $225/6 = $37.50. The rights are worth $40 − 37.50 = $2.50 apiece.

Related Answered Questions

Question: 15.3

In Example 15.2, suppose the rights sell for only $2 instead of the $2.50 we calculated. What can you do? ...

Verified Answer:

You can get rich quickly because you have found a ...
Question: 15.1

In the National Power example, suppose the subscription price is set at $8. How many shares will have to be sold? How many rights will you need to buy a new share? What is the value of a right? What will the price per share be after the rights offer? ...

Verified Answer:

To raise $5 million, $5 million/$8 = 625,000 share...
Question: 15.S-TP.2

Rights Offerings The Hadron Corporation currently has 3 million shares outstanding. The stock sells for $40 per share. To raise $20 million for a new particle accelerator, the firm is considering a rights offering at $25 per share. What is the value of a right in this case? The ex-rights price? ...

Verified Answer:

To raise $20 million at $25 per share, $20 million...
Question: 15.S-TP.1

Flotation Costs The L5 Corporation is considering an equity issue to finance a new space station. A total of $15 million in new equity is needed. If the direct costs are estimated at 7 percent of the amount raised, how large does the issue need to be? What is the dollar amount of the flotation cost ...

Verified Answer:

The firm needs to net $15 million after paying the...