Corporate_Finance_9th_edition_Solutions_Manual_FINAL0

A b c leasing is a form of secured borrowing it

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Unformatted text preview: ROE times the new total equity, or: NI1 = (ROE0)(TE1) = .1620($3,900,000 + 1,100,000) = $807,692 The company’s current earnings per share are: EPS0 = NI0/Shares outstanding0 = $630,000/45,000 shares = $14.00 The number of shares the company will offer is the cost of the investment divided by the current share price, so: Number of new shares = $1,100,000/$73 = 15,068 The earnings per share after the stock offer will be: EPS1 = $807,692/(45,000 + 15,068 shares) = $13.45 The current P/E ratio is: (P/E)0 = $73/$14.00 = 5.214 416 Assuming the P/E remains constant, the new stock price will be: P1 = 5.214($13.45) = $70.11 The current book value per share and the new book value per share are: BVPS0 = TE0/shares0 = $3,900,000/45,000 shares = $86.67 per share BVPS1 = TE1/shares1 = ($3,900,000 + 1,100,000)/60,068 shares = $83.24 per share So the current and new market-to-book ratios are: Market-to-book0 = $73/$86.67 = 0.8423 Market-to-book1 = $70.11/$83.24 = 0.8423 The NPV of the project is the new market value of the firm minus the current market value of the firm, or: NPV = –$1,100,000 + [$70.11(60,068) – $73(45,000)] = –$173,462 Accounting dilution takes place here because the market-to-book ratio is less than one. Market value dilution has occurred since the firm is investing in a negative NPV project. 12. Using the P/E ratio to find the necessary EPS after the stock issue, we get: P1 = $73 = 5.214(EPS1) EPS1 = $14.00 The additional net income level must be the EPS times the new shares outstanding, so: NI = $14(15,068 shares) = $210,959 And the new ROE is: ROE1 = $210,959/$1,100,000 = .1918 or 19.18% Next, we need to find the NPV of the project. The NPV of the project is the new market value of the firm minus the current market value of the firm, or: NPV = –$1,100,000 + [$73(60,068) – $73(45,000)] = $0 Accounting dilution still takes place, as BVPS still falls from $86.67 to $83.24, but no market dilution takes place because the firm is investing in a zero NPV project. 417 13. a. Assume you hold three shares of the company’s stock. The value of your holdings before you exercise your rights is: Value of holdings = 3($63) Value of holdings = $189 When you exercise, you must remit the three rights you receive for owning three shares, and $12. You have increased your equity investment by $12. The value of your holdings after surrendering your rights is: New value of holdings = $189 + $12 New value of holdings = $201 After exercise, you own four shares of stock. Thus, the price per share of your stock is: Stock price = $201 / 4 Stock price = $50.25 b. The value of a right is the difference between the rights-on price of the stock and the ex-rights price of the stock: Value of rights = Rights-on price – Ex-rights price Value of rights = $63 – 50.12 Value of rights = $12.75 c. The price drop will occur on the ex-rights date, even though the ex-rights date is neither the expiration date nor the date on which the rights are first exercisable. If you purchase the stock before the ex-rights date, you will receive the rights. If you purchase the stock on or after the ex-rights date, you will not receive the rights. Since rights have value, the stockholder receiving the rights must pay for them. The stock price drop on the ex-rights day is similar to the stock price drop on an ex-dividend day. The number of new shares offered through the rights offering is the existing shares divided by the rights per share, or: New shares = 1,000,000 / 2 New shares = 500,000 And the new price per share after the offering will be: P= Current market value + Proceeds from offer Old shares + New shares 14. a. 1,000,000($27) + $2,000,000 1,000,000 + 500,000 P = $19.33 P= 418 The subscription price is the amount raised divided by the number of new shares offered, or: Subscription price = $2,000,000 / 500,000 Subscription price = $4 And the value of a right is: Value of a right = (Ex-rights price – Subscription price) / Rights needed to buy a share of stock Value of a right = ($19.33 – 4) / 2 Value of a right = $7.67 b. Following the same procedure, the number of new shares offered through the rights offering is: New shares = 1,000,000 / 4 New shares = 250,000 And the new price per share after the offering will be: P= Current market value + Proceeds from offer Old shares + New shares 1,000,000($27) + $2,000,000 1,000,000 + 250,000 P = $23.20 P= The subscription price is the amount raised divided by the number of number of new shares offered, or: Subscription price = $2,000,000 / 250,000 Subscription price = $8 And the value of a right is: Value of a right = (Ex-rights price – Subscription price) / Rights needed to buy a share of stock Value of a right = ($23.20 – 8) / 4 Value of a right = $3.80 c. Since rights issues are constructed so that existing shareholders' proportionate share will remain unchanged, we know that the stockholders’ wealth should be the same between the two arrangements. However, a numerical example makes t...
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This note was uploaded on 07/10/2010 for the course FIN 6301 taught by Professor Eshmalwi during the Spring '10 term at University of Texas-Tyler.

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