Question

Jekyll 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 $54 to $50.60 ($54 is the rights-on price; $50.60 is the ex-rights price, also known as the when-issued price). The company is seeking $18 million in additional funds with a per-share subscription price equal to $22. 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.) (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Answer 1

A rights issue is an offer made by the company to the existing share holders to purchsae additional shares at a discounted price to the existing price. The intention of the company is to raise additional funds for investment from the existing shareholders. The number of additional shares available for purchase is usually in proportion to the existing shareholding of each investor.

In our above example, the data given is detailed below

1. Share pice post rights issue = $50.60

2. Current Share price = $54

3. Rights Share Allottment price = $22

4. Total Value of Funds raised through Rights issue = $18 million

Hence the total number of shares being issued as a part of Rights issue is = 18 million/22 i.e 818181.82 shares

Assuming x is the number of shares outstanding prior to the rights issue (currently), then (Current price*x+18 million)/(shares issued under rights issue +x) = should be equal to the after right issue share price.

i.e (54x+18 million)/(818181.82+x)=50.60

=> (54x+18 million) = (50.6*818181.82) + 50.6x

=> (54x+18) = 41400000+50.6x

=> 3.4x = 41400000 - 18000000

=> 3.4x = 23,400,000.00

=> x = 23,400,000/3.4

=> x = 6,882,352.94

Hence there are currently 6,882,353 shares outstanding prior to the rights issue.