Calculate the formula value of the right

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Reference no: EM13926660

Oswego Manufacturing Company has decided to sell additional common stock through a rights offering. The company has 50 million shares outstanding and plans to sell an additional 5 million shares through the rights offering. Each share- holder will receive one right for each share currently held, and thus each right will entitle shareholders to purchase 0.1 shares. Oswego's common stock is currently sell- ing at $50 a share, and the subscription price of the rights will be $45 a share.

a. Calculate the formula value of the right for both the rights-on and the ex-rights cases.

b. How much is the market price of the company's stock expected to drop on the ex-rights date, all other things being equal? Why?

c. If the market price of Oswego's common stock increases to $52 a share, what will the formula value of the right be (rights-on case)?

d. Discuss the trend of the right's market price over its life, assuming the com- pany's common stock continues to trade in the $50 range. (No numerical cal- culations are necessary for this part of the problem.)

Reference no: EM13926660

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