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, your boss is considering issuing new shares at a subscription price of $20 in the rights offering.

How many new shares will the firm need to issue to raise the $7,250,000,000? 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

Current market value = current share price * Share outstanding

Current market value = $24.52*1,100,000,000

Current market value = $26,972,000,000

Number of new share issue = Amount raise through right issue/subscription price

Number of new share issue = 7,250,000,000/20

Number of new share issue = 362,500,000

Company will offer one right for one share. so, he is issuing 362,500,000 new share and outstanding share is 1,100,000,000.

Right for purchase a new share = 1,100,000,000/362,500,000 = 3.03 = 3 (Approximate)

Market value of right during subscription = (Stock price - Subscription price)/ (Right for purchase a new share+1)

Market value of right during subscription = (24.52-20)/(3.03+1) = 4.52/4.03

Market value of right during subscription = 1.12

Share price after right offering = (3.03*24.52+20)/4.03 = $23.40

Share price after right offering = $23.40

Total outstanding shares=1,100,000,000? + 362,500,000?

Total outstanding shares = 1,462,500,000

Firm value after right issue = 1,462,500,000*23.40

Firm value after right issue = 34222500000

jeff jeffy answered 1 year ago

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