There Are 10,000,000 Shares Outstanding of O'Connell Co$\text {Sub Price}$

Question

Examlex · Accepted Answer

The Answer is D
Explanation:
Value for one right = R = $1. Stock price, rights on = M₀ = $50. Subscription = S = ?

\begin{array} { l } \mathrm { R } = \frac { \mathrm { M } _ { 0 } - \mathrm { S } } { \mathrm { N } + 1 } \\\$ 1 = \frac { \$ 50 - \mathrm { S } } { \mathrm { N } + 1 }\end{array}

(1)

\begin{aligned}N & = \frac { ext { Number of old shares } } { ext { Number of new shares } } \\& = \frac { \frac { ext { Number of old shares } } { ext { Dollars raised } } } { \mathrm { S } } = \frac { \frac { 10,000,000 } { \$ 100,000,000 } } { \mathrm {~S} } \\& = \frac { 10,000,000 } { ( \$ 100,000,000 ) \mathrm { S } } = 0.1 \mathrm {~S} .\end{aligned}

(2)
Substitute (2) into (1):

\begin{aligned}1 & = \frac { \$ 50 - \mathrm { S } } { 0.1 \mathrm {~S} + 1 } \0.1 \mathrm {~S} + \$ 1 & = \$ 50 - \mathrm { S } \1.1 \mathrm {~S} & = \$ 49 \\mathrm {~S} & = \$ 44.55\end{aligned}

Stock price, ex-rights = M_e = M₀ − R = $50 − $1 = $49.

There Are 10,000,000 Shares Outstanding of O'Connell Co $\text {Sub Price}$