Microsoft Inc. is considering an expansion project. The firm is an all equity firm with a book value of $1,200,000 and the firm has 375,000 shares issued and outstanding. The firm has a tax rate of 40 percent, has just paid its most recent dividend of $3.80 and the firm is expected to grow at 5 percent forever. The return on government T-bills is 3 percent, the return on the market portfolio is 15 percent and the firm has a beta 0.9979. Microsoft has determined the cost of the expansion will be $4,500,000. They have decided to raise the funds by issuing new equity shares through a rights offering. The flotation cost of equity will be 4 percent, and the firm requires that the flotation costs must be covered by the new issue. The new shares will be sold to the existing shareholders at a subscription price of $37.50, which is a discount of the current market price.

d) It is now the day before the expiry date and you need to decide what to do with your rights. You know from your class lectures that the last thing you want to do is let the rights expire. Calculate your net wealth and ownership position in the company if you decide to

e) exercise your rights.

f) Sell your rights