FIN 401 Lecture Notes - Lecture 20: Issued Shares, Eval, Net Present Value

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8 Jan 2018

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# of new shares = funds to be raised/subscription price = m/ = 500,000 or 0. 5m # of rights to buy one share (n) = # of old shares outstanding/# of new shares issued = 5m/0. 5m = 10. Value of a right = (m0 s)/(n + 1) s= (-)/(10+1) = sh. 45 maximum subscription price = current share price mgmt. too much control, result is strong managers and weak shareholders. Agency costs: incurred by the firm as a result of conflicts of interest b/t agent and principal, include. - sp co. has decided to use rights offering to raise additional equity fund. Because of the offering, the share price will drop from (rights- on) to . 50 (ex-rights). The company is seeking million in additional funds with a subscription price equal to /share. Step 1: find the number of rights needed to buy a share: pex-right = 74. 5.

Related Questions

ABC Corp has decided to do a rights offering. It will issue 1 right for each share. The company currently has 10,000,000 shares outstanding. Therefore, there will be 10,000,000 rights. The stock price today is $50 per share. The company wishes to raise $100,000,000. The companyâs net income is $10,000,000. The company does not want earnings per share (EPS) to decline by more than 20%. What is the minimum subscription price that the company must set in the rights issue? How many rights will it take to buy 1 share at this minimum subscription price, and what is the value of one right at this minimum subscription price?

The Clifford Corporation has announced a rights offer to raise $48 million for a new journal, the Journal of Financial Excess. This journal will review potential articles after the author pays a nonrefundable reviewing fee of $3,000 per page. The stock currently sells for $24 per share, and there are 3.6 million shares outstanding.

a.	What is the maximum possible subscription price? What is the minimum? (Leave no cells blank - be certain to enter "0" wherever required.)


The maximum possible subscription price is	$
The minimum price is anything greater than	$

b.	If the subscription price is set at $20 per share, how many shares must be sold? How many rights will it take to buy one share? (Do not round intermediate calculations. Round your rights needed answer to 2 decimal places, e.g., 32.16.)


Number of new shares
Number of rights needed

c.	What is the ex-rights price? What is the value of a right? (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.)


Ex-rights price	$
Value of a right	$

d.	A shareholder with 500 shares before the offering has no desire (or money) to buy additional shares offered as rights. What is his portfolio value before and after the rights offer? (Do not round intermediate calculations and round your final answers to nearest whole number, e.g., 32.)


Portfolio value before rights	$
Portfolio value after rights	$

The Crandall Corporation currently has 100,000 shares outstanding that are selling at $50 per share. It needs to raise $900,000. Net income after taxes is $500,000. Its vice-president of finance and its investment banker have decided on a rights offering, but are not sure how much to discount the subscription price from the current market value. Discounts of 10%, 20%, and 40% have been suggested. Common stock is the sole means of financing for the Crandall Corporation.

1) For each discount, determine the subscription price, the number of shares to be issued, and the number of rights required to purchase one share.(Round to one place after the decimal point where necessary).

2) Determine the value of one right under each of the plans (Round to two places after the decimal point).

3) Compute the earnings per share before and immediately after the rights offering under a 10% discount from the market price.

4) By what percentage has the number of shares outstanding increased?

5) Stockholder X has 100 shares before the rights offering and participated by buying 20 new shares.Computer his total claim to earnings both before and after the rights offering (that is, multiply shares by the earnings per share figures computed in part c).

6) Should Stockholder X be satisfied with this claim over a longer period of time?

FIN 401 Lecture Notes - Lecture 20: Issued Shares, Eval, Net Present Value

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