Response to the following problem:
Suppose you own 50,000 shares of common stock in a firm with 2.5 million total shares outstanding. The firm announces a plan to sell an additional 1 million shares through a rights offering. The market value of the stock is $35 before the rights offering and the new shares are being offered to existing shareholders at a $5 discount.
a. If you exercise your preemptive rights, how many of the new shares can you purchase?
b. What is the market value of the stock after the rights offering?
c. What is your total investment in the firm after the rights offering? How is your investment split between original shares and new shares?
d. If you decide not to exercise your preemptive rights, what is your investment in the firm after the rights offering? How is this split between old shares and rights?