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BBA Company has announced a rights offering to raise $1,000,000 in new shares at a subscription price of $10.05 per share. There are 6,000,000 shares outstanding trading at $11 each.

Question:

1(a) Provide any two reasons why the company might choose a rights offering rather than a general cash offer.

1(b) Identify the ex-rights price and the value of a right.

1(c) Assume stockholders get one right for each share of stock they own and it needs 6 rights to subscribe to a new share. Show why a shareholder with 1,000 shares of ABC before the offering and no desire to buy additional shares is not harmed by the rights offering.