Question

Computer Graphics has announced a rights offering for its shareholders. Carol Stevens owns 1,400 shares of Computer Graphics stock. Four rights plus \(54 cash are needed to buy one of the new shares. The stock is currently selling for \)66 rights-on.

b. How many of the new shares could Carol buy if she exercised all her rights? How much cash would this require?

Short answer

Answer

Carl can buy 350 shares and she would require $18,900 for buying those shares.

Step-by-step solution

Information provided in the question

Shares held by Carol = 1,400

Rights held by Carol = 1,400 rights

Rights required to purchase a new share = 4

Subscription price = $54

Calculation of the number of rights that Carol can purchase and amount of cash required for the same

Carol can purchase 350 shares and she would require $18,900 for buying these shares.

$\begin{array}{rcl}\mathbf{\text{Number of rights that can be purchased}}& \mathbf{=}& \frac{\mathbf{\text{Number of shares held by Carol}}}{\mathbf{\text{Rights per share}}}\\ & \mathbf{=}& \frac{\mathbf{1}\mathbf{,}\mathbf{400}}{\mathbf{4}}\\ & \mathbf{=}& \mathbf{350}\end{array}$

$\begin{array}{rcl}\mathbf{\text{Cash required}}& \mathbf{=}& \mathbf{\text{Number of rights}}\mathbf{\times }\mathbf{\text{Subscription price}}\\ & \mathbf{=}& \mathbf{350}\mathbf{\times }\mathbf{\$}\mathbf{54}\\ & \mathbf{=}& \mathbf{\$}\mathbf{18}\mathbf{,}\mathbf{900}\end{array}$