35 052 using all of this information we can calculate

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Unformatted text preview: his clearer. Assume that an investor holds 4 shares, and will exercise under either a or b. Prior to exercise, the investor's portfolio value is: Current portfolio value = Number of shares × Stock price Current portfolio value = 4($27) Current portfolio value = $108 419 After exercise, the value of the portfolio will be the new number of shares time the ex-rights price, less the subscription price paid. Under a, the investor gets 2 new shares, so portfolio value will be: New portfolio value = 6($19.33) – 2($4) New portfolio value = $108 Under b, the investor gets 1 new share, so portfolio value will be: New portfolio value = 5($23.20) – 1($8) New portfolio value = $108 So, the shareholder's wealth position is unchanged either by the rights issue itself, or the choice of which right's issue the firm chooses. 15. The number of new shares is the amount raised divided by the subscription price, so: Number of new shares = $60,000,000/$PS And the ex-rights number of shares (N) is equal to: N = Old shares outstanding/New shares outstanding N = 10,000,000/($60,000,000/$PS) N = 0.1667PS We know the equation for the ex-rights stock price is: PX = [NPRO + PS]/(N + 1) We can substitute in the numbers we are given, and then substitute the two previous results. Doing so, and solving for the subscription price, we get: PX = $61 = [N($68) + $PS]/(N + 1) $61 = [$68(0.1667PS) + PS]/(0.1667PS + 1) $61 = 11.333PS/(1 + 0.1667PS) PS = $28.15 16. Using PRO as the rights-on price, and PS as the subscription price, we can express the price per share of the stock ex-rights as: PX = [NPRO + PS]/(N + 1) And the equation for the value of a right is: Value of a right = PRO – PX 420 Substituting the ex-rights price equation into the equation for the value of a right and rearranging, we get: Value of a right = PRO – {[NPRO + PS]/(N + 1)} Value of a right = [(N + 1)PRO – NPRO – PS]/(N+1) Value of a right = [PRO – PS]/(N + 1) 17. The net proceeds to the company on a per share basis is the subscription price times one minus the underwriter spread, so: Net proceeds to the company = $25(1 – .06) = $23.50 per share So, to raise the required funds, the company must sell: New shares offered = $4,125,000/$23.50 = 175,532 The number of rights needed per share is the current number of shares outstanding divided by the new shares offered, or: Number of rights needed = 750,000 old shares/175,532 new shares Number of rights needed = 4.27 rights per share The ex-rights stock price will be: PX = [NPRO + PS]/(N + 1) PX = [4.27($45) + 25]/5.27 = $41.21 So, the value of a right is: Value of a right = $45 – 41.21 = $3.79 And your proceeds from selling your rights will be: Proceeds from selling rights = 6,000($3.79) = $22,758.62 18. Using the equation for valuing a stock ex-rights, we find: PX = [NPRO + PS]/(N + 1) PX = [4($75) + $40]/5 = $68 The stock is correctly priced. Calculating the value of a right, we find: Value of a right = PRO – PX Value of a right = $75 – 68 = $7 So, the rights are underpriced. You can create an immediate profit on the ex-rights day if the stock is selling for $68 and the rights are selling for $6 by executing the following transactions: Buy 4 rights in the market for 4($6) = $24. Use these rights to purchase a new share at the subscription price of $40. Immediately sell this share in the market for $68, creating an instant $4 profit. 421 CHAPTER 21 LEASING Answers to Concepts Review and Critical Thinking Questions 1. Some key differences are: (1) Lease payments are fully tax-deductible, but only the interest portion of the loan is; (2) The lessee does not own the asset and cannot depreciate it for tax purposes; (3) In the event of a default, the lessor cannot force bankruptcy; and (4) The lessee does not obtain title to the asset at the end of the lease (absent some additional arrangement). The less profitable one because leasing provides, among other things, a mechanism for transferring tax benefits from entities that value them less to entities that value them more. Potential problems include: (1) Care must be taken in interpreting the IRR (a high or low IRR is preferred depending on the setup of the analysis); and (2) Care must be taken to ensure the IRR under examination is not the implicit interest rate just based on the lease payments. a. b. c. Leasing is a form of secured borrowing. It reduces a firm’s cost of capital only if it is cheaper than other forms of secured borrowing. The reduction of uncertainty is not particularly relevant; what matters is the NAL. The statement is not always true. For example, a lease often requires an advance lease payment or security deposit and may be implicitly secured by other assets of the firm. Leasing would probably not disappear, since it does reduce the uncertainty about salvage value and the transactions costs of transferring ownership. However, the use of leasing would be greatly reduced. 2. 3. 4. 5. A lease must be disclosed on the balance sheet if one of the following criteria is me...
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