Ch15+Answers+to+assigned+problems+v6 - CHAPTER 15 RAISING...

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CHAPTER 15 RAISING CAPITAL Solutions to Questions and Problems NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. 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 = 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: P X = $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 share- holders and also protects against underpricing. 2. a. The maximum subscription price is the current stock price, or $40. 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 = $50,000,000/$35 = 1,428,571 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/1,428,571 new shares = 3.64 c . A shareholder can buy 3.64 rights on shares for: 3.64($40) = $145.60 The shareholder can exercise these rights for $35, at a total cost of: $145.60 + 35.00 = $180.60 The investor will then have: Ex-rights shares = 1 + 3.64
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Ex-rights shares = 4.64 The ex-rights price per share is: P X = [3.64($40) + $35]/4.64 = $38.92 So, the value of a right is: Value of a right = $40 – 38.92 = $1.08 d . Before the offer, a shareholder will have the shares owned at the current market price, or: Portfolio value = (1,000 shares)($40) = $40,000 After the rights offer, the share price will fall, but the shareholder will also hold the rights, so: Portfolio value = (1,000 shares)($38.92) + (1,000 rights)($1.08) = $40,000 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: P X = $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:
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This note was uploaded on 12/12/2010 for the course FNCE FNCE 3P93 taught by Professor Nd during the Fall '10 term at Brock University, Canada.

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Ch15+Answers+to+assigned+problems+v6 - CHAPTER 15 RAISING...

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