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W05 Solution

# W05 Solution - 1FINANCE 401 RYERSON UNIVERSITY Final Exam...

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1 FINANCE 401 RYERSON UNIVERSITY Final Exam - Alan Kaplan - SOLUTION Thursday, April 14, 2005 – 8:00 A.M. Time allowed: 3 hours Aids allowed: Closed book except for an 8’1/2” by 11’ cheat sheet Answer all multiple choice questions on the marksense sheet. The exam is out of 90. All multiple choice questions are worth 1 mark each, and there are 60 multiple choice questions. The exam has been set up so that the multiple choice questions account for 2/3 of the grade and the non-multiple choice questions account for 1/3 of the grade. You may want to budget your time accordingly. Answer all non-multiple choice questions in the answer booklet. Print or write VERY NEATLY , or your answers won’t get marked. 1. Starkly Corp. has 1 million outstanding shares currently trading at \$40 each. The firm wants to raise \$8 million dollars with a new share issue and is thinking of issuing rights to its existing shareholders, and pricing the new shares (that can be purchased with the rights) at \$32 each (the subscription price). What will be the price of the shares in the market after the rights are issued. a) \$32 b) \$36 c) \$38 d) \$38.40 New price = total value / total number of shares. Total value will be \$48M. The total number of shares will equal the current 1M shares plus \$8M/32 = 250,000 which equals 1.25M New price = \$48M / 1.25M = \$38.50 2. Hampton Inc. is thinking of issuing rights to existing shareholders to raise the \$20M in equity that it needs to finance future projects. The current stock price of the shares is \$40 per share, and the subscription price will be \$32 per share. In addition to the above information, which of the following pieces of information is needed in order to determine the expected price of the stock after the rights issue? a) The total number of shares that the firm will need to issue to get the \$20M b) The total number of shares currently outstanding before the rights issue c) The ratio of the subscription price to the current price of the shares d) The percentage of shareholders who will exercise or sell their rights in the event that the rights are issued e) None of the Above

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In order to solve the problem, we need to know the overall value of the firm after the rights are exercised. To do that we need to know the overall value of the firm now, which requires us to know the number of shares currently outstanding 3. Arlisst Corp. wants to raise \$44M in a rights issue. The firm currently has 40,000,000 shares outstanding, valued at \$14 each. The firm wants to issue 4,000,000 shares at \$11 each with the rights issue. What will be the value of each right? a) \$.242 b) \$.2635 c) \$.2727 d) \$.30 e) None of the Above R = (S-E)/(N+1) = (14-11)/(10+1) = \$.2727 4. Which of the following is NOT usually a cost associated with the underwriting process? a)
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W05 Solution - 1FINANCE 401 RYERSON UNIVERSITY Final Exam...

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