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RIGHTS OFFERINGS
Medium:
Subscription price and ex-rights price CO Answer: d MEDIUM
1. Autore Company’s stock now sells for $50 per share, and there are
10,000,000 shares outstanding. 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 Autore set for its offering to obtain the
desired price of the rights, and what will be the ex-rights stock price
(Me), 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.)
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to a publicly accessible website, in whole or in part.
Extension 20A: Rights Offerings Problems Page 1
Rights offering Answer: d MEDIUM
2. To finance the construction of a new plant, Benefield Inc. must raise
an additional $10,000,000 of equity capital through the sale of common
stock. The firm currently has an EPS of $5.40 and a P/E ratio of 10,
with 1,200,000 shares outstanding. The firm will offer new shares to
its current stockholders at $40 per share. Find (1) the number of new
shares to be issued, (2) the ex-rights price of the stock (assuming
that the new market value of the stock will simply be the proceeds of
the new issue plus the current value of equity, divided by new shares
outstanding), and (3) the value of one right.
a. $29.55
b. $33.78
c. $39.28
d. $41.80
e. $50.00
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to a publicly accessible website, in whole or in part.
M0 S
R =
N 1
$50 S
$1 = . (1)
N 1
$50 S
$1 =
0.1S 1
0.1S + $1 = $50 - S
1.1S = $49
S = $44.55.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted
to a publicly accessible website, in whole or in part.
(2) Current market value of stock where P/E = 10 and EPS = $5.40:
P
10, therefore
$5.40
P $54.00.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted
to a publicly accessible website, in whole or in part.
(1) Current market value of stock where P/E = 10 and EPS = $5.40.
P
10, therefore
$5.40
P $54.00.
(2)
Market value of stock, ex - rights
Ex-rights price =
Old shares New shares
$74,800 ,000
$50 = ; X = 296,000 new shares issued.
1,200 ,000 X
$8,000,000 needed
= 100,000 shares needed.
$80 / share
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted
to a publicly accessible website, in whole or in part.