Example $8-4$

Suppose you own $1,000$ shares in a firm which has $1$ million total shares outstanding. The firm announces its plan to sell an additional $500,000$ shares through right offerings.

Each shareholder will receive what amount of right for each share owned?

What is your current ownership in the firm? What is your ownership in the firm after the rights offering and assuming you bought all the shares according to your right?

Suppose market value of the common stock is $$40$ before the rights offering. And the new $500,000$ shares are offered at $10\%$ discount, $$36.$

What is the firm total market value before the offering? After the offering? What is the share price after the offering?

Suppose you decide not to exercise your preemptive right.

How much can you sell your right for?

What was your initial wealth in the company?

What is your wealth in the company after the right offering if you do not sell your rights? After you sell your rights? Did your wealth change?