Dear Tutors – Any one can help me again with this question.
BCG Bhd. has 600,000 shares outstanding with a current market price of $1.60 per share. The company needs to raise an additional $180,000 to finance new expenditures, and has decided on a rights issue. The issue will allow current stockholders to purchase one additional share for 10 rights at a subscription price of $1.20 per share.
i. Calculate the ex-rights price that would make a new stockholder indifferent between buying shares at the old stock price and exercising the rights or buying the shares ex-rights.
ii. If the ex-rights price were set at $7.90, would you as a potential new stockholder choose to
buy shares ex-rights or buy shares at the old price and exercise your rights?