The Stearns Corporation has 500,000 shares outstanding with a current market price of exist40 per share. The company needs to raise an additional exist2,000,000 to finance new expenditures, and has decided on a rights issue. The issue will allow current stockholders to purchase one additional share for 5 rights.
Calculate the ex-rights price that will make a new stockholder indifferent between buying shares at the old stock price and exercising the rights buying the shares ex-rights.
If the ex-rights price is set at exist32.90, will you as a potential new stockholder choose to buy shares ex-rights or buy shares at the old price and exercise your rights? Explain your answer.