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Extension 20A Rights Offerings: Multiple Choice: Problems
Extension 20A Rights Offerings: Multiple Choice: Problems
RIGHTS OFFERINGS
Medium:
Subscription price and ex-rights price CO Answer: d MEDIUM
1. Autore Company’s stock now sells for $50 per share, and there are
10,000,000 shares outstanding. The company plans to raise $100 million
as new equity by selling common stock. Since the preemptive right is in
the corporate charter, rights will be used. Management has decided that
the rights should be worth $1 each: Such a price would assure that most
stockholders would either exercise or sell their rights rather than just
letting them expire, yet a careless failure to use the rights would not
impose too severe a hardship on anyone. What subscription price should
Autore set for its offering to obtain the desired price of the rights,
and what will be the ex-rights stock price (Me), assuming the
theoretical relationships hold? (Hint: N = Number of old shares/Number
of new shares; Number of new shares = Dollars to be raised/Subscription
price per share.)
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to a publicly accessible website, in whole or in part.
Extension 20A: Rights Offerings Problems Page 1
Rights offering Answer: d MEDIUM
2. To finance the construction of a new plant, Benefield Inc. must raise an
additional $10,000,000 of equity capital through the sale of common
stock. The firm currently has an EPS of $5.40 and a P/E ratio of 10,
with 1,200,000 shares outstanding. The firm will offer new shares to
its current stockholders at $40 per share. Find (1) the number of new
shares to be issued, (2) the ex-rights price of the stock (assuming that
the new market value of the stock will simply be the proceeds of the new
issue plus the current value of equity, divided by new shares
outstanding), and (3) the value of one right.
a. $29.55
b. $33.78
c. $39.28
d. $41.80
e. $50.00
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted
to a publicly accessible website, in whole or in part.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted
to a publicly accessible website, in whole or in part.
M 0 −S
R = N +1
$50−S
.
$1 = N +1 (1)
$50−S
$1 = 0.1S+1
0.1S + $1 = $50 - S
1.1S = $49
S = $44.55.
P Current market
=10 , therefore =(P )(Number of shares outstanding )
Funds to be raised $10,000 ,000 $ 5.40 value of stock
Subscription price $ 40 P=$54 .00. =$54 (1,200,000)=$64,800,000.
Current market Proceeds from Market value of Subscription
+ −
Ex-rights price value of stock new issue Value of stock, ex-rights price
= =
per share Old shares+New shares one right Number of rights to purchase one share*
$ 64 , 800 , 000+ $ 10 , 000 ,000 $ 51. 59−$ 40 .00
= =$51. 59 . = =$2 . 41 .
1 , 200 ,000+ 250 ,000 4.8
P
=10, therefore
Number of rights required Old shares 1 ,200 , 000 $ 5.40
= = =4 . 8.
to purchase one share New shares 250 , 000 P=$54.00.
Current market
=(P )(Number of shares outstanding )
value of stock Market value of stock, ex-rights $74 ,800 ,000
=$54 (1,200,000)=$64,800,000. Old shares+New shares 1,200 ,000+X
M 0 −S $ 90−$ 80 $ 10
Value of a right= = = =$0 . 91 .
N +1 10+1 11
$50−S
0.1S+1 . Rights offering CO
Answer: d MEDIUM
(2) Current market value of stock where P/E = 10 and EPS = $5.40:
P
=10 , therefore
$ 5.40
P=$54 .00.
Current market
=(P )(Number of shares outstanding )
value of stock
=$54 (1,200,000)=$64,800,000.
Current market Proceeds from
+
Ex-rights price value of stock new issue
=
per share Old shares+New shares
$ 64 , 800 , 000+ $ 10 , 000 ,000
= =$51. 59 .
1 , 200 ,000+ 250 ,000
P Current market
=10 , therefore =(P )(Number of shares outstanding )
$ 5.40 value of stock Market value of stock, ex-rights
P=$54 .00. =$54 (1,200,000)=$64,800,000. Old shares+New shares
$74 ,800 ,000 Funds to be raised $10,000,000 $8,000,000 needed 1,000,000 rights issued
1,200 ,000+X New shares 296,000 $ 80 /share 100,000 shares needed
M 0 −S $ 90−$ 80 $ 10
Value of a right= = = =$0 . 91 .
N +1 10+1 11
(1) Current market value of stock where P/E = 10 and EPS = $5.40.
P
=10 , therefore
$ 5.40
P=$54 .00.
Current market
=(P )(Number of shares outstanding )
value of stock
=$54 (1,200,000)=$64,800,000.
P Current market
=10 , therefore =(P )(Number of shares outstanding )
$ 5.40 value of stock Market value of stock, ex-rights
P=$54 .00. =$54 (1,200,000)=$64,800,000. Old shares+New shares
Answer: c MEDIUM
$8,000,000 needed
$80 /share = 100,000 shares needed.
M 0 −S $ 90−$ 80 $ 10
Value of a right= = = =$0 . 91 .
N +1 10+1 11