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hw 15 prob. 1-10

hw 15 prob. 1-10 - Big Time Inc is proposing a rights...

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Big Time, Inc., is proposing a rights offering. Presently there are 350,000 shares outstanding at \$68 each. There will be 53,000 new shares offered at \$54 each. a. The new market value of the company is \$. (Do not include the dollar sign (\$).) b. There are rights associated with one of the new shares. (Round your answer to 2 decimal places. (e.g., 32.16)) c. The ex-rights price is \$. (Do not include the dollar sign (\$). Round your answer to 2 decimal places. (e.g., 32.16)) d. The value of a right is \$. (Do not include the dollar sign (\$). Round your answer to 2 decimal places. (e.g., 32.16)) Explanation: 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(\$68) + 53,000(\$54) = \$26,662,000 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/53,000 new shares = 6.6 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 = \$26,662,000/(350,000 + 53,000) = \$66.16 d. The value of a right = \$68 – 66.16 = \$1.84

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The number of new shares will be the amount raised divided by the subscription price, so: Number of new shares = \$40,000,000/\$24 = 1,666,667 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 = 4,160,000 shares outstanding/1,666,667 new shares = 2.5 c. A shareholder can buy 2.5 rights on shares for: 2.5(\$40) = \$99.84 The shareholder can exercise these rights for \$24, at a total cost of: \$99.84 + 24 = \$123.84 The investor will then have: Ex-rights shares = 1 + 2.5 Ex-rights shares = 3.5 The ex-rights price per share is: P X = [2.5(\$40) + \$24]/3.5 = \$35.42 So, the value of a right is: Value of a right = \$40 – 35.42 = \$4.58 d.

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hw 15 prob. 1-10 - Big Time Inc is proposing a rights...

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