Question

Red Shoe Co. has concluded that additional equity financing will be needed to expand operations and that the needed funds will be best obtained through a rights offering. It has correctly determined that as a result of the rights offering, the share price will fall from $55 to $51.00 ($55 is the rights-on price; $51.00 is the ex-rights price, also known as the when-issued price). The company is seeking $23 million in additional funds with a per-share subscription price equal to $40. How many shares are there currently, before the offering? (Assume that the increment to the market value of the equity equals the gross proceeds from the offering.)

Answer 1

Solution:-

Calculation of the number of new shares

            Number of new shares = Additional fund required / Subscription price

                                                    = $23,000,000/ $40

                                                    = 575,000 shares.

The number of shares before right can be calculated form following formula

                      Ex-right price = Market value / Total number of shares

$51=[$23,000,000+$ 55*Outstanding shares ] / [ outstanding shares+575,000]

$51*outstanding shares+$29,325,000= $23,00,000+$55* Outstanding shares

$4*outstanding shares = $6,325,000

Outstanding Shares = 1,581,250

Hence the number of shares outstanding before the right issue is1,581,250..

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