A company has 10,000,000 shares outstanding and needs to raise $100,000,000 in equity funds. Stockholders have preemptive rights, so the firm must initially offer new stock to current stockholders. While a share sells for $35, management believes that it can successfully offer new stock to existing stockholders for $32, a discount of approximately 8.5 percent.

a) How many shares must be issued to raise the desired amount of funds?

b) A stockholder who owns 100 shares will be offered the right to buy how many shares? How many rights are necessary to purchase a new share?

c) By how much will the price of the stock decline when it trades “rights off”?

d) If the price of the stock subsequently rises to $36 after the stock trades “rights off,” what is the value of a right?

e) If investors who receive the rights do not sell them and do not exercise the rights, what happens to their relative position in the firm?