The following question requires the calculation of the firm's market interactions through a rights offering provided to its shareholders and their maintained proportions of shares.
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The firm Davis & Martin and Zanders, Inc. (DMZ) has just announced that it will issue 10 million shares of common stock through a rights issue at a subscription price of $20. Before the announcement, DMZ shares were trading at $26, and there were 50 million shares outstanding.
a. How many rights will DMZ grant to its existing shareholders?
b. How many rights will an investor need to buy one of DMZ’s shares?
c. What will happen to DMZ’s share price when the rights issue is announced?
d. What should be the value of one right?