Company made rights issue at $5 a share of one new share
every 4 shares held. before there were 10 million shares outstanding
with a price of $6.

a. What was the total amount of new money raised?
b. What was the value of the right to buy one new share?
c. What was the prospective stock price after the issue?
d. How far could the total value of the company fall before
shareholders would be unwilling
to take up their rights?

a. 10 million shares/4 shares/right = 2.5 million new shares.  @
$5/sh. = $12.5 million.
b. $6 - [($6 * 10 million + $5 * 2.5 million)/(10 million + 2.5
million)] = $6 - $5.80 = $0.20.
c. $5.80 (see part b.)
d. At or below $5, the rights have no value.  Therefore, the company
would have to be worth $5 * 10 million = $50 million or less rather
than its current $60 million before shareholders would give up their
rights.

Sincerely,

Wonko

Source:  "Solutions to Rights Problems"
http://www.wright.edu/~marlena.akhbari/fin419/420solutions.doc