The Holyoke Corporation has 120,000 shares outstanding with a current market price of $8.10 per share. The company needs to raise an additional $36,000 to finance new expenditures, and has decided on a rights issue. The issue will allow current shareholders to purchase one additional share for 20 rights at a subscription price of $6 per share.
a. find out the ex-rights price that would make a new shareholder indifferent between buying shares at the old stock price and exercising the rights or buying the shares ex-rights.
b. Suppose that the company was also considering structuring the rights issue to allow for an additional share to be purchased for 10 rights at a subscription price of $3. Prove that a shareholder with 100 shares would be indifferent between purchasing a new share for 10 rights at $3 or purchasing a new share for 20 rights at $6