Question

Nemesis, Inc., has 250,000 shares of stock outstanding. Each share is worth $88, so the company’s market value of equity is $22,000,000. Suppose the firm issues 62,000 new shares at the following prices: $88, $82, and $76.

What will be the ex-rights price and the effect of each of these alternative offering prices on the existing price per share? (Leave no cells blank; if there is no effect select "No change" from the dropdown and enter "0". Round your answers to 2 decimal places, e.g., 32.16.)

Answer 1

Old share price of Nemesis, Inc. = $88 per share

Number of share outstanding = 250,000 shares

Therefore, Market Value of shares prior to issue of new shares = $88 * 250,000 = $22,000,000

Number of share for new right issue = 62,000 shares

If Price of new issue = $88 per share

Cash raised from new issue = $88 * 62,000 = $5,456,000

Ex-rights stock price = (Market Value of shares prior to rights issue + Cash raised from new issue)/ Total Number of shares after the new issue

= ($22,000,000 + $5,456,000)/ (250,000 + 62,000)

= $27,456,000/ 312,000

= $88.00 per share

If Price of new issue = $82 per share

Cash raised from new issue = $82 * 62,000 = $5,084,000

Ex-rights stock price = (Market Value of shares prior to rights issue + Cash raised from new issue)/ Total Number of shares after the new issue

= ($22,000,000 + $5,084,000)/ (250,000 + 62,000)

= $27,084,000/ 312,000

= $86.81 per share

If Price of new issue = $76 per share

Cash raised from new issue = $76 * 62,000 = $4,712,000

Ex-rights stock price = (Market Value of shares prior to rights issue + Cash raised from new issue)/ Total Number of shares after the new issue

= ($22,000,000 + $4,712,000)/ (250,000 + 62,000)

= $26,712,000/ 312,000

= $85.62 per share