8. Analysis of rights offering

Some stockholders have a preemptive right that allows them to maintain their ownership percentage in the company by purchasing additional shares of any new stock issues.

Rights offerings, like preemptive rights, prevent dilution of stock for existing shareholders when new shares are issued. Which of these companies are likely to make a rights offering?

Companies with excess free cash flow that can be used to fund growth projects

Companies that need to raise additional capital to fund growth projects

Suppose you own 1,000 shares of Muster Manufacturing Co. You received an announcement on December 15 that stated Muster Manufacturing Co. plans to sell an additional 2 million shares of common stock through a rights offering to shareholders as of January 15. The current market price of the Muster Manufacturing Co.s shares is $35.20 per share, and as per the announcement of the offering, the subscription price of the rights is $30.80. As an active shareholder, you collect and calculate the following information to use in your analysis of the rights offering:(Note: Round your intermediate calculation to two decimal places. )

	Your review of your share transaction details reveals that you bought 800 shares of Muster Manufacturing Co. on January 13 and 200 shares on January 15.
	This means that you have shares that trade with rights-on and shares that trade ex-rights.
	Muster Manufacturing Co. has 11 million shares of common stock outstanding. Thus, each right will enable you to buy shares through the rights offering, and it would take rights to purchase 1 new share.
	Each stockholder receives 1 right for each share currently held. You will be eligible to purchase new shares in the new share offering.

Based on the information you collected and calculated above, complete the following table for your analysis of the rights offering. (Note: Round your intermediate calculation to two decimal places.)

	Value
Formula value of a right for the rights-on case	per right
Market price of Muster Manufacturing Co. stock on January 14	per share
Formula value of a right when the stock is trading ex-rights	per right
Formula value of a right for the rights-on case if market price increases to $45.10	per right