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The Oil City Company plans to sell an additional 1 million shares of common stock through a rights offering. The company currently has 12 million shares outstanding. Each shareholder will receive one right for each share currently held. Therefore, each right will enable shareholders to purchase 0.0833 shares. Oil City's common stock is currently selling for $30 per share, and the subscription price of the rights will be
$25 per share.

a. Calculate the formula value of the right for both the rights-on and ex-rights cases.

b. Determine the amount that the market price of the company's stock is expected to drop on the ex-rights date, assuming that all other things are equal.

c. If the market price of Oil City's common stock increases to $40 per share, what is the formula value of the rights (rights-on case)?

Financial Management, Finance

  • Category:- Financial Management
  • Reference No.:- M91599528

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