Some stockholders have a preemptive right that allows them to maintain their ownership percentage in the company by purchasing additional shares

of any new stock issues.

Rights offerings, like preemptive rights, prevent dilution of stock for existing shareholders when new shares are issued. Which of these companies are

likely to make a rights offering?

Companies that need to raise additional capital to fund growth projects

Companies with excess free cash flow that can be used to fund growth projects

Suppose you own $1,000$ shares of Houston Horticulture Co$.$ You received an announcement on December $15$ that stated Houston Horticulture Co$.$ plans

to sell an additional $3$ million shares of common stock through a rights offering to shareholders as of January $15.$ The current market price of the

Houston Horticulture Co$.\text{'}$s shares is $$38\mathrm{.}40$ per share, and as per the announcement of the offering, the subscription price of the rights is $$33\mathrm{.}60.$ As

an active shareholder, you collect and calculate the following information to use in your analysis of the rights offering:$($Note: Round your intermediate

calculation to two decimal places. $)$

Your review of your share transaction details reveals that you bought $800$ shares of Houston Horticulture Co$.$ on January $13$ and $200$ shares on

January $15.$

This means that you have

shares that trade with rights$-$on and

shares that trade ex$-$rights.

Houston Horticulture Co$.$ has $12$ million shares of common stock outstanding. Thus, each right will enable you to buy

shares through the rights

offering, and it would take

rights to purchase $1$ new share.

Each stockholder receives $1$ right for each share currently held. You will be eligible to purchase

new shares in the new share offering.

Based on the information you collected and calculated above, complete the following table for your analysis of the rights offering. $($Note: Round your

intermediate calculation to two decimal places.$)$

Value

Formula value of a right for the rights$-$on case

per right

Market price of Houston Horticulture Co$.$ stock on January $14$

per share

Formula value of a right when the stock is trading ex$-$rights

per right

Formula value of a right for the rights$-$on case if market price increases to $$49\mathrm{.}20$

per right