Question

A company currently has 120k shares outstanding, selling at $55 per share. The firm intends to raise $605k through a rights offering. Management suggests that a discount cannot fall below 13% as outlined in the previous issue, to which existing shareholders did not respond with much enthusiasm. They believe that a 37% discount offer is more appropriate. Also, the CEO is rejecting calls for raising capital through debt or preferred stock. Net earnings after taxes (EAT) are $538k. Furthermore, a recent corruption scandal involving a number of senior figures in the firm has come to light in the press; soon after the rights offering was announced – in other words, it was already too late. Among the immediate consequences were a fall in stock price by 24.34% and increased capital requirements by 63%.

Required: In percentage terms, determine by how much did the dollar value of one right change before and after the consequences described above, together with the 37% discount offer which was simultaneously taking place.

Answer% Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places (for example: 28.31%).

Note: The term “k” is used to represent thousands (× $1,000).

Answer 1

How much did the dollar value of one right change before and after the consequences = 27.62% (negative)

Note:

Theoretical ex-rights price per share is the company's share price after the rights is issued and is computed as follows:

Theoretical ex-rights price per share = (current market value of shares+value of rights shares) / (current shares outstanding + right shares offered).

Workings: