Ross5eChap20sm - Chapter 20: Issuing Equity Securities to...

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Chapter 20: Issuing Equity Securities to the Public 20.1 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 = 350,000($85) + 70,000($70) = $34,650,000 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 = 350,000 old shares/70,000 new shares = 5 rights per new share 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: M e =$34,650,000/(350,000 +70,000) =$82.50 d. The value of the right, Value of a right = $85.00 – 82.50 = $2.50 e. A rights offering usually costs less, it protects the proportionate interests of existing shareholders and also protects against underpricing. 20.2 a. The maximum subscription price is the current stock price, or $20. The minimum price is anything greater than $0. b. The number of new shares will be the amount raised divided by the subscription price, so: Number of new shares = $30,000,000/$15 = 2,000,000 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 = 5,200,000 shares outstanding/2,000,000 shares =2.6 c. A shareholder can buy 2.6 rights on shares for: 2.6($20) = $52 The shareholder can exercise these rights for $15, at a total cost of: $52 + $15 = $67 The investor will then have: Ex–rights shares = 1 + 2.6 Ex–rights shares = 3.6 Answers to End–of–Chapter Problems B–60
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The ex–rights price per share is: R e = [2.6($20) + $15]/3.6 = $18.61 So, the value of a right is: Value of a right = $20 – 18.61 = $1.39 d. Before the offer, a shareholder will have the shares owned at the current market price, or: Portfolio value = (1,000 shares)($20) = $20,000 After the rights offer, the share price will fall, but the shareholder will also hold the rights, so: Portfolio value = (1,000 shares)($18.61) + (1,000 rights)($1.39) = $20,000 20.3 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: M e = $74.50 = [N($80) + $40]/(N + 1) N = 6.273 The number of new shares is the amount raised divided by the per–share subscription price, so: Number of new shares = $15,000,000/$40 = 375,000 And the number of old shares is the number of new shares times the number of shares ex–rights, so: Number of old shares = 6.273(375,000) = 2,352,375 20.4 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($65) Value of holdings = $195 When you exercise, you must remit the three rights you receive for owning three shares, and ten dollars. You have increased your equity investment by $20. The value of your holdings after surrendering your rights is: New value of holdings = $195+$20 New value of holdings = $215 After exercise, you own four shares of stock. Thus, the price per share of your stock is: Stock price = $215/4 Stock price = $53.75 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: Answers to End–of–Chapter Problems B–61
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Ross5eChap20sm - Chapter 20: Issuing Equity Securities to...

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