2. You work in the Finance Department for Flynn, Inc. Your firm needs to raise $6,500,000,000...

2. You work in the Finance Department for Flynn, Inc. Your firm needs to raise $6,500,000,000 ($6.50B) to finance new capital investments. Your boss is considering raising this capital using a rights offering. He has asked you to analyze the effect of such an offering on the firm’s shareholders. The firm has 750,000,000 shares outstanding. These are currently selling on the stock exchange for $32.52. Calculate the current market value of firm equity. To raise the needed $6,500,000,000 in new capital, your boss is considering issuing new shares at a subscription price of $25 in the rights offering. How many new shares will the firm need to issue to raise the $6,500,000,000? Calculate the number of rights that will be needed to purchase a new share. During the subscription period, what will be the market value of a right? After the rights offering, what will be the firm value? The number of outstanding shares? The share price?

Solutions

Expert Solution

To solve this problem let us first note down the given information in brief .

1. Shares outstanding of Flynn Inc - 750,000,000

2.Current Market Price - $32.52

Therefore current market value of firm equity = No of shares x Price per share

= 750,000,000 x 32.52 = $24,390,000,000

Subscription price in case of rights offering = $ 25

To raise $ 6,500,000,000 number of shares needed = 6500,000,000 / 25

= 260,000,000

It is concluded that 260,000,000 number of shares will be added to the existing 750,000,000 shares.So for every 75 shares held, 26 shares will be given at a subscription price of $25.00

Market value of Right = ($32.52- $25 ) /No of right required to buy one share +1

No of rights required to purchase 1 share= 260,000,000 / 750,000,000 = 0.35

Price of share after right issue = (32.52 x 1 + 25 x 0.35 )/1.35 = $ 30.57

Shares outstanding = 750,000,000 + 260,000,000= 1010,000,000

Firm value = 30.57 x 1010,000,000

= $ 30,875,000,000

(Note - Clear ratio of distribution of rights share is not mentioned )

jeff jeffy answered 1 year ago

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