Problem 15-1 Rights Offerings [LO4] Hickock, Inc, is proposing a rights offering

Question

Problem 15-1 Rights Offerings [LO4] Hickock, Inc, is proposing a rights offering. Presently there are 800,000 shares outstanding at $48 each. There will be 160,000 new shares offered at $40 each a. What is the new market value of the company? (Do not round intermediate calculations.) New market value b. How many rights are associated with one of the new shares? (Do not round intermediate calculations.) Number of rights needed . What is the ex-rights price? (Do not round intermediate calculations. Round your answer to decimal places, e.g, 32.16. Ex-rights price d. What is the value of a right? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g, 32.16) Value of a right HintsReferences eBook & Resources Hint#1

Explanation / Answer

Present: 800,000 shares at $48

Right Issue : 160,000 shares at $40

For one right issue one need to have 800,000/160,000 shares = 5 shares

Market Value of the firm = 800,000 * $48 + 160,000 * $40 = $38,400,000 + 6,400,000

= 44,800,000

Question 1: Market value of the firm = 44,800,000

Qusetion 2. 5 rights are associated with one new share

Question3.

Ex price = Market value / Total share = 44,800,00/(800,000+160,000)

= 44,800,000/960,000 = 46.67

Question 4.

Value of the right will be the difference between market price and ex price

Value = $48 - $46.67 = $1.33

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