Math of rights offering

A rights offering is a way for a company to raise capital by giving existing shareholders the right to purchase additional shares at a discounted price, usually proportional to their current holdings. For example, if a company offers a 1-for-5 rights issue at $10 per share when the market price is $15, shareholders can buy one new share for every five they own, thus having the opportunity to maintain their ownership percentage. The value of the rights can be calculated as the difference between the market price and the subscription price, adjusted for the dilution effect of the new shares. This mechanism helps companies raise funds while giving existing shareholders the chance to avoid dilution of their ownership.