Pandora Box Company Inc. makes a rights issue at a subscription price of $5 a share. One new share can be purchased for every five shares held. Before the issue there were 10 million shares outstanding and the share price was $6.

a. What is the total amount of new money raised?

b. What is the expected stock price after the rights are issued?

c. By what percentage would the total value of the company need to fall before shareholders would be unwilling to take up their rights?

d. Suppose that you initially own 100 shares plus $100 in the bank. If you take up your rights issue, what will be your total wealth after the issue is completed?

e. Suppose that the company now decides to issue the new stock at $4 instead of $5 a share. How many new shares would it have needed to raise the same sum of money?

f. What is the expected stock price under this new arrangement after the rights are issued?

g. If you take up your rights issue under this new arrangement, what will be your total wealth after the issue is completed?

h. Which arrangement makes you better off: the first, the second, or neither?