ABC Limiteds shares are selling for $25 per share. Because of rapid expansion in recent years, the board of directors of the firm decides to raise funds for expansion. The firm announces a rights offering with a subscription price of $20 per share. One new share can be purchased for every four shares held.

a What is the value of one right? (5 marks)

b Assume that all rights have been subscribed, what will the ex-rights price be? (2 marks)

c Suppose that the price of a right is higher than the value estimated in (b). Explain how you would exploit the difference, assuming you hold 10 shares at $25 and the market price of one right is $1.20.

(8 marks)

d As a stockholder, are you concerned about the dilution? Briefly explain. (4 marks)

e Discuss the advantages of a rights offering over a common stock offering. (6 marks)