Suppose you own 40,000 shares of common stock in a firm with 500,000 total share

Question

Suppose you own 40,000 shares of common stock in a firm with 500,000 total shares outstanding. The firm announces a plan to sell an additional 100,000 shares through a rights offering. The market value of the stock is $40 before the rights offering and the new shares are being offered to existing shareholders at a $5 discount.

1.What is the value of your investment before the new shares are Issued?

2.If you exercise your preemptive rights, how many of the new shares can you purchase?

3.What is the market value of the stock after the rights offering?

4. What is your total investment in the firm after the rights offering?

Please show work

Explanation / Answer

Answer:1. Value of Investment Before the new shares are issued=

Total no of shares* Market value

=540000*40=2160,0000

Answer:3 Market value of share after right offering= 40-5=$35

Answer:4 440000*35=15400000

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