Problem: The Harmon Candy Co. has announced a rights offering for its shareholders.
Cindy Barr owns 500 shares of Harmon Candy Co. stock. Five rights plus $62 cash are needed to buy one of the new shares. The stock is currently selling for $70 rights-on.
Q1. What is the value of a right?
Q2. How many of the new shares could Cindy buy if she exercised her rights? How much cash would this require?
Q3. Cindy does not know if she wants to exercise rights or sell them. What alternative would have the most beneficial effect on her wealth?