1. In-class exercise Instructions:
Please hand in your answer to the following question. You must work independently and show your process. The answer will be posted on the course website.
Firm ABC just had a rights offering. Before the rights offering, its stock was trading at $12 per share with total number of shares outstanding of 2 million. 2 rights are needed to buy a share. The ex-right stock price is $10. Assuming all rights are exercised, how much money did the firm raise through the rights offering?

2. Solution
Two ways
New firm value = new stock price * new s.o. = 10 *(2m + 2m/2) = 30 m
old firm vlaue = 2*12 = 24m
financing = = 6m
b. More mathematical way (and less intuitive)
New stock price = old price – value of right
Right value =12-10 = 2 = (12-sub. price)/(2+1)
Sub. Price = 6
Financing = Subscription price * # new shares = 6*1m = 6m