Miller Fruit wants to expand its citrus grove operations. The firm estimates tha
ID: 2728865 • Letter: M
Question
Miller Fruit wants to expand its citrus grove operations. The firm estimates that it needs $8.6 million to buy land and establish its operations. Currently, the firm has 540,000 shares of stock outstanding at a market price per share of $47.50. If the firm decides to raise the needed capital through a rights offering, one right will be issued for each share of stock. The subscription price will be set at $40 a share. How many rights will a shareholder need to purchase one new share of stock in this offering?
Miller Fruit wants to expand its citrus grove operations. The firm estimates that it needs $8.6 million to buy land and establish its operations. Currently, the firm has 540,000 shares of stock outstanding at a market price per share of $47.50. If the firm decides to raise the needed capital through a rights offering, one right will be issued for each share of stock. The subscription price will be set at $40 a share. How many rights will a shareholder need to purchase one new share of stock in this offering?
Explanation / Answer
No. of new shares to be issued = amount to raise / subscription price per share
= 8,600,000 / 40
= 215,000
Rights needed to purchase to buy a share = existing no. of shares/ no. of new shares to be issues
= 540,000 / 215,000
= 2.51 rights
Therefore, option E is correct.