The management of Dragonfly Inc. has decided to increase its equity capital by undertaking a rights issue. It is planned to raise additional capital of $20 million. The company has 5,000,000 outstanding common shares with a current market price of $50 per share. Shareholders need 10 rights to buy a new share.
a) Calculate the ex-rights price per share and the value of a right.
b) Justin currently has 20,000 shares of Dragonfly’s common stock and $50,000 cash. Assume Justin exercises his rights to buy the new shares, determine the amount of gain or loss for Justin.