Question

Suppose you own 50,000 shares of common stock in a firm with 2.5 million total shares outstanding. The firm announces a plan to sell an additional 1.5 million shares through a rights offering. The market value of the stock is $35 before the rights offering and the new shares are being offered to existing shareholders at a $5 discount.

a.	If you exercise your preemptive rights, how many of the new shares can you purchase?

   

New shares

b.	What is the market value of the stock after the rights offering? (Enter your answer in millions rounded to 1 decimal place. (e.g., 32.1))

   

Market value

$ million

    

c-1.	What is your total investment in the firm after the rights offering? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. (e.g., 32.16))

   

Total investment

$ million

c-2.	If you exercise your preemptive right how many original shares and how many new shares do you have?

Original shares
New shares

d-1.	If you decide not to exercise your preemptive rights, what is your investment in the firm after the rights offering? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places. (e.g., 32.161))

Investment

$ million

d-2.	If you sell your rights rather than use them, how much money will you receive from the rights sale and what is the total value of your proceeds from the sale of the rights offering plus your investment in the firm? (Enter your answer in millions rounded to 3 decimal places. (e.g., 32.161))

Sale of rights	$ million
Total investment	$ million

Answer D please

Answer 1

(a)

ORIGINALLY INVESTOR HAS 50000 EQUITY SHARES OUT OF TOTAL 25,00,000 SHARES. SO HE HAS 2% STAKE

NOW IF 15,00,000 RIGHTS ARE OFFERED, HE WILL GET 2% OF 15,00,000

SO HE WILL GET 30,000 RIGHT SHARES

(b)

INITIAL VALUE OF SHARES = 2.5 MILLION X 35 = 87.5 MILLION

VALUE OF RIGHT SHARES = 1.5 MILLION X 30 = 45 MILLION

SO TOTAL VALUE = 87.5 + 45 = 132.5 MILLION

(c)

(1) VALUE OF STOCK OF INVESTOR

INITIAL VALUE OF SHARES = 0.05 MILLION X 35 = 1.75 MILLION

VALUE OF RIGHT SHARES = 0.03 MILLION X 30 = 0.9 MILLION

SO TOTAL VALUE = 1.75 + 0.9 = 2.65 MILLION

(2)

ORIGINAL HOLDING =50000

RIGHT SHARES =30000

(d)

IF YOU DONT PURCHASE RIGHT SHARES, THE YOU WILL HAVE 50000 ORIGINAL SHARES ONLY

AND VALUE WILL BE FIRST CALCULATED AS IF YOU HAVE TAKEN RIGHT SHARES

50000 X 35 = 17,50,000

30000 X 30 = 9,00,000

TOTAL VALUE = 26,50,000, SO VALUE PER SHARE = 26,50,000/80,000 = 33.125

IF NOW HE HAS NOT OPTED FOR RIGHT SHARES, VALUE WILL BE

50000 X 33.125 = 16,56,250 = 1.656250 MILLION

(d)(2)

VALUE OF RIGHT = MARKET PRICE - AVERAGE PRICE AFTER RIGHT SHARE

VALUE OF RIGHT = 35 -33.125 (AS CALCULATED ABOVE)

VALUE OF RIGHT = 1.875

SO TOTAL VALUE OF RIGHT = 1.875 X 30000 =56250 = 0.05625 MILLION

AND VALUE OF INVESTMENT, WE LAREADY CALCULATED ABOVE = 1.656 MILLION