You Own 500 Shares of Common Stock in a Firm

question 7

Essay

You own 500 shares of common stock in a firm that has 2 million shares outstanding. The firm announces a plan to sell an additional 500,000 shares through a rights offering.
a) How many rights to purchase new shares will you receive?
b) Suppose that the market price per share is $30, but each right allows you to purchase a share of stock for $27. What should be the value of one right?
c) If you sold your rights, how much money should you make?

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Definitions:

Social Loafing

The occurrence in which people put in less effort towards reaching a goal when they are part of a group compared to when they are working solo.

Common Goal

A shared objective or aim among members of a group.

Groupthink

A phenomenon whereby a group makes faulty decisions because of group pressures, leading to a degradation of mental efficiency, reality testing, and moral judgment.

Social Facilitation

The tendency for people to perform differently when in the presence of others than when alone, often improving on simple or well-rehearsed tasks.