Problem 1: Jelly Beans, Inc., is proposing a rights offering. There are 100,000 outstanding shares at $25 each. There will be 10,000 new shares issued at a $20 subscription price.
a. What is the value of a right?
b. What is the ex-rights price?
c. What is the new market value of the company?
d. Why might a company have a rights offering rather than a common stock offering?
Problem 2. Suppose that the company was also considering structuring the rights issue to allow for an additional share to be purchased for 10 rights at a subscription price of $3. Prove that a stockholder with 100 shares would be indifferent between purchasing a new share for 10 rights at $3 or purchasing a new share for 20 rights at $6.