Bell Hill Mfg. is considering a rights offer. The company has determined that th

Question

Bell Hill Mfg. is considering a rights offer. The company has determined that the ex-rights price would be $78. The current price is $100 per share, and there are 25 million shares outstanding. The rights offer would raise a total of $50 million.

What is the subscription price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Bell Hill Mfg. is considering a rights offer. The company has determined that the ex-rights price would be $78. The current price is $100 per share, and there are 25 million shares outstanding. The rights offer would raise a total of $50 million.

Explanation / Answer

Let the Subscription price = X.

It means that number of shares issued will be $ 50 million / X.

Theorotical ex-Right price =

New Shares * subscription price + old shares * market price / Old shares + New shares.(Master Formula)

So we have to find out the the number of right shares issued, which will be as follows:-

a) Let the Right share issued as Y, it means that the current market value would be (25 million shares + Y shares)*100.

b) Now 50 million will be raised by issuing right shares and the the ex- right price given is 78, so value of shares before right issue is 25 million * 78 = $1950 million.

So the market value after right issue shoul be $ 1950 + $50= $2000 million.

Now by equating (a) and (b) we get the following equation,

$2000 million = 25 million*100 + 100 Y.

So, no. of right shares is 5 million.

Now putting this value in the master formula and solving we get the Subscription Price (Right price) as 32.

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