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 $25 to $22.10 ($25 is the rights-on price; $22.10 is the ex-rights price, also known as the when-issued price). The company is seeking $10 million in additional funds with a per-share subscription price equal to $15.

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

Solution:-

Calculation of the number of new shares

            Number of new shares = Additional fund required / Subscription price

                                                    = $10,000,000/ $15

                                                    = 666,667 shares.

The number of shares before right can be calculated form following formula

                      Ex-right price = Market value / Total number of shares

$22.1=[$10,000,000+$ 25*Outstanding shares ] / [ outstanding shares+666,667]

$22.1*outstanding shares+$1,47,33,340.7‬= $25,00,000+$25* Outstanding shares

$2.9*outstanding shares = $1,22,33,340.7‬

Outstanding Shares = 42,18,393

Hence the number of shares outstanding before the right issue is 42,18,393

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