CH 15 PRACTICE PROBLEMS - SOLUTIONS

1) You decide to sell an additional 1,500 shares of stock in your firm through a Dutch
auction. The bids that you receive include:

   

How much will you receive in total from selling the additional 1,500 shares? Ignore all
transaction and flotation costs. 
A. $57,000
B. $58,500
C. $60,750
D. $60,782

Since you need to issue 1,500 shares, you need to find that highest bid that would result
in 1500 shares being sold. All 1500 shares will not be sold until the price hits $39.
Therefore, $39 will be the offer price in the IPO. The total amount received from selling
the shares = 1500 x $39 = $58,500

2) Two IPOs will commence trading next week. Andrew places an order to buy 500
shares of IPO A. Jessica places an order to purchase 300 shares of IPO A and 200 shares
of IPO B. Both IPOs are priced at $30 a share. Andrew is allocated 150 shares of IPO A.
Jessica is allocated 100 shares of IPO A and 200 shares of IPO B. At the end of the first
day of trading, IPO A is selling for $32 a share and IPO B is selling for $28 a share. What
is the difference in the total profits or losses that Andrew and Jessica have as of the end
of the first day of trading? 
A. $100
B. $200
C. $300
D. $400
E. $500

Solution: Andrew's profit = 150  ($32 - $30) = $300

Jessica's profit = [100  ($32 - $30)] + [200  ($28 - $30)] = $200 - $400 = -$200;

Difference = $300 - (-$200) = $500

Winter_2017 Prof. Willis Page 1

3) Jack's Camping Equipment needs $30 million to finance a new facility to manufacture
outdoor grills. The management has met with underwriters who feel that the firm could
sell additional shares of stock at $19 a share with a 7 percent underwriting spread. The
estimated issue costs are $315,000. How many shares of stock will Jack's need to sell if
they choose firm commitment underwriting for their new facility? 
A. 1,697,793 shares
B. 1,706,053 shares
C. 1,707,213 shares
D. 1,715,620 shares
E. 1,721,321 shares

Total value of issue = ($30,000,000 + $315,000) / (1 - .07) = $32,596,774.19; Number of

shares needed = $32,596,774.19 / $19 = 1,715,619.69 = 1,715,620 shares

4) Mister Noodle wants to raise $24 million through a rights offering. The current market
price of the stock is $18, the subscription price is $16, and there are 4 million shares of
stock outstanding. How many shares need to be sold in the rights offering? 
A. 1.33 million
B. 1.50 million
C. 2.67 million
D. 3 million
E. 6 million

 # of shares to be issued = $24,000 000/$16 = 1,500,0000 shares

 

5) Tell-Al, Inc. has 8 million shares of common stock outstanding at a market price of
$22. The company has just announced a rights offering for $27 million at a subscription
price of $18. What is the ex-rights price? 
A. $20.00
B. $20.88
C. $21.02
D. $21.37
E. $21.76

# of new shares to be issued: $27,000,000/$18 = 1,500,000 new shares

N: the number of rights required to purchase one new share

# of existing shares 8,000,000
N    5.33
# of new shares 1,500,000

M 0  S $22  $18
Value of a right (R) = R    $0.63
N 1 5.33  1
Ex –Rights Price = M0-R = $22-$0.63 = $21.37

Winter_2017 Prof. Willis Page 2

6) The Purple Nickel is seeking to raise $8 million though a rights offering. Two rights
will be required to purchase each new share of stock. Currently, there are 1.6 million
shares outstanding at a market price of $12 per share. What is the ex-rights price? 
A. $11.00
B. $11.33
C. $11.50
D. $11.58
E. $11.77

 
# of existing shares 1,600,000
N  2
# of new shares # of new shares
Therefore, # of new shares = 1,600,000/2 = 800,000

Subscription Price (S) = $8,000,000/800,000 shares = $10

Value of a right:
$12  $10
R  $.67
2 1
Ex Rights Price (Me) = $12 -$0 .67 = $11.33

7) The Green Hornet wants to raise $25 million in a rights offering. The stock price is
$48 a share, the subscription price is $40 a share, and there are 4 million shares
outstanding. What is the value of one right? 
A. $0.97
B. $1.03
C. $1.08
D. $1.11
E. $1.33

# of new shares to be issued: $25,000,000/$40 = 625,000 new shares

N: the number of rights required to purchase one new share

# of existing shares 4,000,000
N    6.40
# of new shares 625,000

M 0  S $48  $40
Value of a right (R) = R    $1.08
N 1 6 .4  1

8)
Winter_2017 Prof. Willis Page 3
a) N =?
$5,000,000
Number of new shares to be issued =  100,000
$50

500,000
Number of rights required to buy one new share  N  100,000  5

M0  S $68  $50
R =  $3 per right
N 1 5 1

b) The share price will drop by the value of the right (to $68 - $3 = $65) on the ex-rights
date, which is 2 business days before the holder of record date.

M0  S $84  $52
9) a) R  =  $4
N 1 7 1

The ex-rights price per share (Me) = $84 – $4 = $ 80

b) Value before the rights offering = 700 shares * $84 = $58,800

(1) Shareholder exercises all the rights:

Market value of original shares:

700 x $80 = $56,000

Market value of new shares:

700/7 = 100 new shares
100 x $80 = $8,000
Less cash paid to purchase shares:
100 x 52 = -$5,200
Total market value $58,800 (no change)

(2) Rights are sold:

Market value of shares
(700 * $80) $56,000
Plus cash received from sale of rights:

700 * $4 + 2,800
Total market value $58,800 (no change)

(3) Rights expire:

Market value of shares

Winter_2017 Prof. Willis Page 4

 (700*$80) $56,000
Loss to shareholder
$2,800

The shareholder is neither better, nor worse off, as long as he or she either exercises
or sells the rights. However, if he or she lets them expire, a loss of $2,800 is suffered.

$200,000,000
10) (a) Have to issue  10,000,000 new shares
$20
ABC will be issuing 10,000,000 rights since they have 10,000,000 shares outstanding.
Therefore, 1 right will be required per new share.

M0  S
(b) R 
N 1
25  20
  $2.50
11

(c)
(i) Rights on Price (M0) = $25
(ii) Ex Rights Price (Me): Before holder of record date= $25 - $2.50 = $22.50
(iii) Ex Rights Price (Me): After holder of record datesdfg = $22.50

11a) - Number of additional shares to be issued: Desired funds to be raised

Subscription price

$50,000
  10,000
$5.00

b. Number of rights to buy one additional share:

# of existing shares
N 
# of new shares
90,000
 9
10,000

M 0  S $10.00  $5.00 5.00

c. R    $.50
N 1 9 1 10.00

d.
Announcement Ex-rights Holder of Expiry After Expiry
Date Date Record Date Date Date
Share $10.00 $9.50 $9.50 $9.50 $9.50

Winter_2017 Prof. Willis Page 5

Right $0.50 $0.50 $0.50 $0.00

e.
i)
Wealth
900 old shares @ 10.00 = 9,000.00
Ownership 900 = 1.0000%
90,000
ii)
Wealth
900 old shares @ 9.50 = 8,550.00
100 new shares @ 9.50 = 950.00
Gross 9,500.00
Less: additional investment
100 new shares @ 5.00 = 500.00
Net wealth 9,000.00

Ownership 1,000 = 1.0000%

100,000
iii)
Wealth
900 old shares @ 9.50 = 8,550.00
900 rights for cash @ 0.50 = 450.00
Net wealth 9,000.00

Ownership 900 = 0.9000%

100,000
iv)
Wealth
900 old shares @ 9.50 = 8,550.00
900 rights for cash @ - = -
Net wealth 8,550.00

Ownership 900 = 0.9000%

100,000

12)

Winter_2017 Prof. Willis Page 6

 a) # New shares to be issued: 2,000,000 / $4.00 = 500,000

# of existing shares
b) N  # of new shares
N = 2,000,000/500,000 = 4

It will take 4 rights to purchase one new share

c) What is the value of a right?

M 0  S $6  $4 $2
R    $0.40
N 1 4 1 5

d) What is the ex-rights price of the firm's stock?

M e  M o  R  $6.00  $0.40  $5.60

e) Rodney owns 5% of Classique,

which means he owns 5%(2,000,000) = 100,000 shares

i) What is the wealth and ownership position of Rodney on the

announcement date?
Wealth:
Number Amount
Shares 100,000 @ 6.00 = 600,000.00

Ownership = 5% (given)

ii) What is his wealth and ownership position on ex-rights date?

Number Amount
Shares 100,000 @ 5.60 = 560,000.00
Rights 100,000 @ 0.40 = 40,000.00
Total Wealth 600,000.00

Winter_2017 Prof. Willis Page 7

 iii) On the expiry date Rodney decided to exercise his rights. What is his
net wealth and ownership position?
Wealth:
# New shares purchased = 100,000 / 4 = 25,000 shares
Number Amount
Old Shares 100,000 @ 5.60 = 560,000.00
New Shares 25,000 @ 5.60 = 140,000.00
Total Wealth 700,000.00
Less cost of new 25,000 @ 4.00 = - 100,000.00
Net Wealth 600,000.00 (no change)
Ownership: 125,000 shares/2,500,000 = 5% (no change)

iv) On the expiry date, Rodney decides to sell the rights rather than
exercise the rights. What is his net wealth and ownership position?
Wealth:
Number Amount
Shares 100,000 @ 5.60 = 560,000.00
Sell Rights for Cash 100,000 @ 0.40 = 40,000.00
Total Wealth 600,000.00 (no change)

Ownership: 100,000 shares/2,500,000 = 4 % (decrease)

Winter_2017 Prof. Willis Page 8