chapter 15 solution

# chapter 15 solution - Basic 1. a. The new market value will...

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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 = 500,000(\$81) + 60,000(\$70) = \$44,700,000 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 = 500,000 old shares/60,000 new shares = 8.33 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 = \$44,700,000/(500,000 + 60,000) = \$79.82 d. The value of the right Value of a right = \$81.00 – 79.82 = \$1.18 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 \$53. 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 = \$40,000,000/\$48 = 833,333 shares And the number of rights needed to buy one share will be the current shares outstanding divided by the number of new shares offered, so: Number of rights needed = 4,100,000 shares outstanding/833,333 new shares = 4.92

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c . A shareholder can buy 4.92 rights on shares for: 4.92(\$53) = \$260.76 The shareholder can exercise these rights for \$48, at a total cost of: \$260.76 + 48 = \$308.76 The investor will then have: Ex-rights shares = 1 + 4.92 Ex-rights shares = 5.92 The ex-rights price per share is: P X = [4.92(\$53) + \$48]/5.92 = \$52.16 So, the value of a right is: Value of a right = \$53 – 52.16 = \$0.84 d . Before the offer, a shareholder will have the shares owned at the current market price, or: Portfolio value = (1,000 shares)(\$53) = \$53,000 After the rights offer, the share price will fall, but the shareholder will also hold the rights, so: Portfolio value = (1,000 shares)(\$52.16) + (1,000 rights)(\$0.84) = \$53,000 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 = \$74.80 = [N(\$81) + \$40]/(N + 1) N = 5.613 The number of new shares is the amount raised divided by the per-share subscription price, so: Number of new shares = \$20,000,000/\$40 = 500,000 And the number of old shares is the number of new shares times the number of shares ex- rights, so: Number of old shares = 5.613(500,000) = 2,806,452
4. If you receive 1,000 shares of each, the profit is: Profit = 1,000(\$7) – 1,000(\$5) = \$2,000 Since you will only receive one-half of the shares of the oversubscribed issue, your profit will be: Expected profit = 500(\$7) – 1,000(\$5) = –\$1,500 This is an example of the winner’s curse. 5.

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## This note was uploaded on 01/29/2012 for the course MAN 4635 taught by Professor Q during the Spring '11 term at Metro State.

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chapter 15 solution - Basic 1. a. The new market value will...

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