The Oil City Company plans to sell an additional 1 million shares of common stock through a

Question:

The Oil City Company plans to sell an additional 1 million shares of through a rights offering. The company currently has 12 million shares outstanding. Each shareholder will receive one right for each share currently held. Therefore, each right will enable shareholders to purchase 0.0833 shares. Oil City’s is currently selling for $30 per share, and the subscription price of the rights will be $25 per share.
a. Calculate the formula value of the right for both the rights-on and ex-rights cases.
b. Determine the amount that the market price of the company’s stock is expected to drop on the ex-rights date, assuming that all other things are equal.
c. If the market price of Oil City’s increases to $40 per share, what is the formula value of the rights (rights-on case)?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...