Question 1

Fintech company has concluded that additional equity financing will be needed to expand operations and that the needed funds will be best obtained through a rights offering. It has correctly determined that as a result of the rights offering, the share price will fall from $73 to 68.95 ($73 is the right-on price; $68.95 is the ex-rights price, also known as the when-issued price). The company is seeking $16 million in additional funds with a per-share subscription price equal to $45. How many shares are there currently, before the offering? (Assume that the increment to the market value of the equity equals the gross proceeds from the offering.)

Question 2

Excellent company has announced a rights offer. The company has announced that it will take four rights to buy a new share in the offering at a subscription price of $20. At the close of business the day before the ex-rights day, the company's stock sells for $50 per share. The next morning, you notice that the stock sells for $44 per share and the rights sells for $5 each. Are the stock and/or the rights correctly priced on the ex-rights day? Describe a transaction in which you could use these prices to create an immediately profit.