Bigfi, Inc., is proposing a rights offering.
There are 300,000 shares outstanding, trading at $20 each.
There will be 20,000 new shares issued at a $15 subscription price.
1. What is the new market value of the firm?
2. What is the ex-rights price?
3. What is the value of a right?
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1. The market value of the firm after the rights offering can be calculated as follows:
Market value of existing shares = 300,000 shares x $20 = $6,000,000
Value of new shares issued = 20,000 shares x $15 = $300,000
Total market value of the firm = $6,000,000 + $300,000 = $6,300,000
2. The ex-rights price is the price at which the stock will be trading without the rights attached. It can be calculated as follows:
Total market value of the firm after rights offering = $6,300,000
New shares issued = 20,000 shares
Ex-rights price = ($6,300,000 / 320,000 shares) = $19.69
3. The value of a right can be calculated as the difference between the ex-rights price and the subscription price for the new shares.
Value of a right = Ex-rights price - Subscription price
Value of a right = $19.69 - $15 = $4.69
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