chprobSM_ch20

chprobSM_ch20 - Chapter 20: Issuing Securities to the...

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Chapter 20: Issuing Securities to the Public 20.1 Rights offerings are cheaper than general cash offers. Even so, most new equity issues in the U.S. are underwritten general cash offers. In Canada, the bought deal is cheaper, probably due to the savings available through POP and concentrated selling efforts. 20.2 b.. In general, the ex-rights price is P = (Market value + Proceeds from offering) / Total number of shares P = ($25 x 100,000 + $18 x 10,000) / (100,000 + 10,000) = $24.36 a.. The value of a right is the difference between the rights-on price of the stock and the ex-rights price of the stock. The value of a right is $0.64 (=$25 - $24.36). Alternative solution: The value of a right can also be computed as: (Ex-rights price - Subscription price) / Number of rights required to buy a share of stock Value of a right = ($24.36 - $18) / 10 = $0.64 c. The market value of the firm after the issue is the number of shares times the ex-rights price. Value = 110,000 x $24.36 $2,680,000 (Note that the exact ex-rights price is $24.3636.) d. The most important reason to offer rights is to reduce issuance costs. Also, rights offerings do not dilute ownership and they provide shareholders with more flexibility. Shareholders can either exercise or sell their rights. 20.3 The value of a right = $50 - $45 = $5 The number of new shares = $10,000,000 / $25 = 400,000 The number of rights / share = ($45 - $25) / $5 = 4 The number of old shares = 400,000 x 4 = 1,600,000 20.4 a. Max = $25, Min = anything> $0 b. 50,000,000/15 = 3,333,333 shares 32,000,000/3,333,333 = 9.6 rights c. M e = [25 (9.6) + 15] / 10.6 = $24.06 R o = 25 – 24.06 = $0.94 d. After: 100 (24.06) + 100 (0.94) = $2,500 Before: 100 (25) = $2,500 20.5 Number of new shares = $40,000,000/S
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This note was uploaded on 03/17/2009 for the course ACTSC 371 taught by Professor Wood during the Fall '08 term at Waterloo.

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chprobSM_ch20 - Chapter 20: Issuing Securities to the...

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