Question

In: Finance

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?

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 2 years ago

You work in the Finance Department for Flynn, Inc. Your firm needs to raise $7,250,000,000 ($7.25B)...

You work in the Finance Department for Flynn, Inc. Your firm needs to raise $7,250,000,000 ($7.25B) 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 1,100,000,000 shares outstanding. These are currently selling on the stock exchange for $24.52. Calculate the current market value of firm equity. To raise the needed $7,250,000,000 in new capital,...

Husker’s Tuxedo’s, Inc. needs to raise $262 million to finance its plan for nationwide expansion. In...

Husker’s Tuxedo’s, Inc. needs to raise $262 million to finance its plan for nationwide expansion. In discussions with its investment bank, Husker’s learns that the bankers recommend an offer price (or gross price) of $40 per share and they will charge an underwriter’s spread of $2.35 per share. Calculate the net proceeds per share to Husker’s from the sale of stock. How many shares of stock will Husker’s need to sell in order to receive the $262 million needed?

Q7 a) Your firm needs to raise $97.7 million in funds. You can borrow short term...

Q7 a) Your firm needs to raise $97.7 million in funds. You can borrow short term at a spread of 1% over LIBOR. Alternatively, you can issue 10-year, fixed-rate bonds at a spread of 2.57% over 10-year Treasuries, which currently yield 7.62%. Current 10-year interest rate swaps are quoted at LIBOR versus the 8.1% fixed rate. Management believes that the firm is currently “underrated” and that its credit rating is likely to improve in the next year or two. Nevertheless,...

You will function as employees within a finance department of XYZ Inc. Your goal is to...

You will function as employees within a finance department of XYZ Inc. Your goal is to propose changes to the way XYZ manages its money. Currently, the CFO maintains all of XYZ's cash holdings at a local bank. You will propose changes to this policy by developing a portfolio made up of T-Bills, STRIPS, and Bonds that optimizes the return for XYZ under constraint. Suppose XYZ has average monthly cash holdings of $15 million, revenue of $8 million, and expenses...

You work in a Finance department and are asked to analyze the economics of an existing...

You work in a Finance department and are asked to analyze the economics of an existing jet, which would be retired in four years. A new jet is purchased each time a jet is retired because the CEO travels regularly. If other managers use the existing jet, the company would save $1,000,000 each year on commercial airline flights, however, operating costs (e.g. fuel, maintenance) for the existing jet would be $700,000 greater each year, and the jet would need to...

Your company needs to raise $46 million to finance a new factory. You’re evaluating two different...

Your company needs to raise $46 million to finance a new factory. You’re evaluating two different 25-year bonds to raise these funds: a coupon bond with an annual coupon rate of 7 percent; and a zero coupon bond. Your company’s tax rate is 30 percent. Both bonds will have a par value of $1,000, and a required annual return of 7 percent with semi-annual compounding. a-1. How many of the coupon bonds would you need to issue to raise the $46...

Your company needs to raise $44 million to finance a new factory. You’re evaluating two different...

Your company needs to raise $44 million to finance a new factory. You’re evaluating two different 20-year bonds to raise these funds: a coupon bond with an annual coupon rate of 8 percent; and a zero coupon bond. Your company’s tax rate is 40 percent. Both bonds will have a par value of $1,000 and a required annual return of 8 percent with semi-annual compounding. a-1. How many of the coupon bonds would you need to issue to raise the $44...

You are a manager who work at finance department of ANZ Corporation in Malaysia. You are...

You are a manager who work at finance department of ANZ Corporation in Malaysia. You are interested to analyse the core principles of finance that influence your company’s financial figures. Explain any FIVE (5) principles of finance that give significant impacts to your decision making process in order to achieve the desired financial performance for year 2020.

To work in the finance department you will need to know they features of organisational policies...

To work in the finance department you will need to know they features of organisational policies and procedures relating to budgeting and forecasting. What are organisational policies and procedures, what is a budget, how does forecasting impact on budgets and from what sources will information about organisational policies and procedures come?

LG Ltd needs to raise $500,000 to finance the acquisition of a new tour bus. It...

LG Ltd needs to raise $500,000 to finance the acquisition of a new tour bus. It approached an investment bank that proposed the following alternatives: The issue of 8%, cumulative preference shares for $500,000 with a fixed redemption date 5 year from the date of issue; or The issue of 10%, non-cumulative, preference shares of $500,000, redeemable at the option of the issuer The preference share issue is planned for 2019. The accountant prepared an abridged projected statement of financial...