Bell Hill Mfg. is considering a rights offer. The company has determined that the ex-rights price would be $78. The current price is $100 per share, and there are 25 million shares outstanding. The rights offer would raise a total of $50 million. What is the subscription price?

6.5

Explanation:

We can calculate Ex-Rights using following formula:

Ex-Rights = (Current Shares * Shares outstanding + Amount Raised) / (Current Shares + Amount Raised / Subscription Price)

Here

Market Value is $100

Shares Outstanding are 25 million

Amount Raised is $50 million

Ex-Rights price is $78

By putting values, we have:

$78 = (($100 * 25m) + $50m) / (25m + (50m/Subscription price))

$78 = ($2550) / (25m + ($50m/Subscription Price))

$78 / ($2550m)    =  1 / (25m + ($50m/Subscription Price))

0.0000030588 = 1 / (25m + ($50m/Subscription Price))

Taking reciprocal, we have:

1 / 0.0000030588 =  (25m + ($50m/Subscription Price))

$32.6923m  = $25m + $50m / Subscription Price

$32.6923m  - $25m  = $50m / Subscription Price

$7.6923m = $50m / Subscription Price

$7.6923m / $50m  = 1 / Subscription Price

0.153846 = 1 / Subscription Price

Taking Reciprocal, we have:

Subscription Price = 6.5

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