Corporate_Finance_9th_edition_Solutions_Manual_FINAL0

40 per share 415 assuming the pe remains constant the

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Unformatted text preview: ugh negotiation, which helps increase the possibility of a successful offering. 12. There are two possible reasons for stock price drops on the announcement of a new equity issue: 1) Management may attempt to issue new shares of stock when the stock is over-valued, that is, the intrinsic value is lower than the market price. The price drop is the result of the downward adjustment of the overvaluation. 2) When there is an increase in the possibility of financial distress, a firm is more likely to raise capital through equity than debt. The market price drops because the market interprets the equity issue announcement as bad news. 13. If the interest of management is to increase the wealth of the current shareholders, a rights offering may be preferable because issuing costs as a percentage of capital raised are lower for rights offerings. Management does not have to worry about underpricing because shareholders get the rights, which are worth something. Rights offerings also prevent existing shareholders from losing proportionate ownership control. Finally, whether the shareholders exercise or sell their rights, they are the only beneficiaries. 14. Reasons for shelf registration include: 1) Flexibility in raising money only when necessary without incurring additional issuance costs. 2) As Bhagat, Marr and Thompson showed, shelf registration is less costly than conventional underwritten issues. 3) Issuance of securities is greatly simplified. 15. Basic empirical regularities in IPOs include: 1) underpricing of the offer price, 2) best-efforts offerings are generally used for small IPOs and firm-commitment offerings are generally used for large IPOs, 3) the underwriter price stabilization of the after market and, 4) that issuing costs are higher in negotiated deals than in competitive ones. Solutions to Questions and Problems NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem. Basic 1. a. The new market value will be the current shares outstanding times the stock price plus the rights offered times the rights price, so: New market value = 450,000($90) + 80,000($84) = $47,220,000 b. The number of rights associated with the old shares is the number of shares outstanding divided by the rights offered, so: Number of rights needed = 450,000 old shares/80,000 new shares = 5.63 rights per new share 411 c. The new price of the stock will be the new market value of the company divided by the total number of shares outstanding after the rights offer, which will be: PX = $47,220,000/(450,000 + 80,000) = $89.09 d. The value of the right Value of a right = $90.00 – 89.09 = $0.91 e. 2. a. b. A rights offering usually costs less, it protects the proportionate interests of existing shareholders and also protects against underpricing. The maximum subscription price is the current stock price, or $34. The minimum price is anything greater than $0. The number of new shares will be the amount raised divided by the subscription price, so: Number of new shares = $40,000,000/$30 = 1,333,333 shares And the number of rights needed to buy one share will be the current shares outstanding divided by the number of new share offered, so: Number of rights needed = 3,400,000 shares outstanding/1,333,333 new shares = 2.55 c. A shareholder can buy 2.55 rights on shares for: 2.55($34) = $86.70 The shareholder can exercise these rights for $30, at a total cost of: $86.70 + 30.00 = $116.70 The investor will then have: Ex-rights shares = 1 + 2.55 Ex-rights shares = 3.55 The ex-rights price per share is: PX = [2.55($34) + $30]/3.55 = $32.87 So, the value of a right is: Value of a right = $34 – 32.87 = $1.13 d. Before the offer, a shareholder will have the shares owned at the current market price, or: Portfolio value = (1,000 shares)($34) = $34,000 412 After the rights offer, the share price will fall, but the shareholder will also hold the rights, so: Portfolio value = (1,000 shares)($32.87) + (1,000 rights)($1.13) = $34,000 3. Using the equation we derived in Problem 2, part c to calculate the price of the stock ex-rights, we can find the number of shares a shareholder will have ex-rights, which is: PX = $70.25 = [N($75) + $50]/(N + 1) N = 4.263 The number of new shares is the amount raised divided by the per-share subscription price, so: Number of new shares = $15,000,000/$50 = 300,000 And the number of old shares is the number of new shares times the number of shares ex-rights, so: Number of old shares = 4.263(300,000) = 1,278,947 4. If you receive 1,000 shares of each, the profit is: Profit = 1,000($8) – 1,000($5) = $3,000 Since you will only receive one-half of the shares of the oversubscribed issue, your profit will be: Expected profit = 500($8) – 1,000($5) = –$1,000 This is an example of the winner’s curse. 5. Using X to stand for the required sale proceeds, the equation to calculate the total s...
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