A company wants to raise $5 million via a rights offering. The company’s stock currently sells for $25 per share. Eight rights will be needed to buy a new share in the offering at a subscription price of $20.

1. How many new shares need to be issued?

2. How many shares outstanding are there before the offering?

3. What is the value of a right?

4. Assume that immediately following the ex-rights date the company’s stock sells for $24.44 per share and the rights sell for $0.50 each. Show how you could create an immediate profit