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13 December, 10:43

Miller Fruit wants to expand its citrus grove operations. The firm estimates that it needs $8.6 million to buy land and establish its operations. Currently, the firm has 540,000 shares of stock outstanding at a market price per share of $34.80. If the firm decides to raise the needed capital through a rights offering, one right will be issued for each share of stock. The subscription price will be set at $33 a share. How many rights will a shareholder need to purchase one new share of stock in this offering?

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  1. 13 December, 13:53
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    2.072 rights

    Explanation:

    Amount needed to buy the land = $8.6 million = $8,600,000

    stock outstanding = 540,000

    Market price per share = $34.80

    subscription price = $33 a share

    Now,

    Number shares to be issued = (Amount needed) : (subscription price)

    = $8,600,000 : $33

    = 260606.06 shares

    1 rights will be issued per stock

    thus,

    number of rights required for purchase

    = (stock outstanding) : (Number shares to be issued)

    = 540,000 : 260606.06

    = 2.072 rights
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