Rights_offering-Practice - FIN 3361.1 Additional Practice...

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FIN 3361.1 Additional Practice Problems: 1) ABC Industries wants to raise $200 million through a rights offering. It currently has 10 million shares outstanding with a market price of $25 each. It has decided to set the subscription price for the rights offering at $20 per share. a) How many rights will be required to buy one new share? b) What will the value of one right be? c) Assuming that no other news about this firm comes out, what will be the stock price i) after announcement date but before ex-rights date? ii) after ex-rights date, but before holder of record date? iii) after the holder of record date? 2) A firm wants to raise $300,000,000 in new equity capital and decides to do so through a rights offering. The firm currently has 75 million shares outstanding and these shares currently trade at a price of $10 each. The firm decides to set the subscription price in the rights offering at $8. (a) How many rights must the firm require to buy each new share? (b) What is the rights-on price and what will be the ex-rights price of the stock (assuming no other news about the firm comes out during the rights offering)? (c) What is the value of one right? (d) Take you answer from part (a) and assume that a shareholder owns that many shares in the company before the rights offering. Calculate the shareholders wealth: (i) before the rights offering, (ii) after the rights offering assuming they exercise the rights, (iii) after the rights offering assuming they sell the rights, and (iv) after the rights offering assuming that they let the rights expire. (e) Given your answer to (d), what is the point of a rights offering? Why would a company bother to do it? 3) Five years ago, St. John’s Oil floated a $50 million face value, 20 year bond issue carrying  8.25% coupon interest. The bond indenture carries a call provision that makes it possible  for the firm to retire them by calling them at a call price of 114% of par value anytime  after the bonds had been outstanding for more than 5 years. Flotation costs five years ago  amounted to $825,000. A new 15-year $50 million face value bonds would carry a 7.25%  coupon interest rate. The investment dealer responsible for underwriting the new issue  estimates that two months will be required to sell the new bond issue. Flotation costs  associated with the new issue are estimated at $850,000. Proceeds from the new issue can  be invested in Government T-bills at 3% per year. St. John’s Oil’s marginal tax rate is  40%.  a. Should the bonds be called? b. Would you expect investors to react negatively to the refunding decision?
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4) There is a corporation with five seats on the board of directors. Your group of minority shareholders has managed to gain control of 34 percent of the 100,000 voting shares. How many seats can you be assured of if the voting is done cumulatively or non-
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This note was uploaded on 01/07/2012 for the course FIN 3361 taught by Professor Mishra during the Spring '11 term at Dalhousie.

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Rights_offering-Practice - FIN 3361.1 Additional Practice...

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