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

Short Answer

There are 10,000,000 shares outstanding of O'Connell Co.'s stock,which now sells for $50 per share.The company plans to raise $100 million as new equity by selling common stock.Since the preemptive right is in the corporate charter,rights will be used.Management has decided that the rights should be worth $1 each: Such a price would assure that most stockholders would either exercise or sell their rights rather than just letting them expire,yet a careless failure to use the rights would not impose too severe a hardship on anyone.What subscription price should O'Connell set for its offering to obtain the desired price of the rights,and what will be the ex-rights stock price (M_e),assuming the theoretical relationships hold? (Hint: N = Number of old shares/Number of new shares; Number of new shares = Dollars to be raised/Subscription price per share.) $\text {Sub Price}$ $\quad$ $\text {Ex-rights}$
a. $\$ 39.65 \quad\quad \$ 42.50$
b. $\$ 40.25 \quad \quad\$ 43.50$
c. $\$ 42.65 \quad\quad \$ 47.50$
d. $\$ 44.55 \quad\quad \$ 49.00$
e. $\$ 46.65 \quad\quad \$ 50.00$