Question

In 2010, Pandora, Inc., makes a rights issue at a subscription price of $5 a share. One new share can be purchased for every four shares held. Before the issue there were 8 million shares outstanding, and the share price was $6.5.

a.	What is the total amount of new money raised? (Round your answer to 2 decimal places.)
	Total amount of money raised    $ million

b.	What is the expected stock price after the rights are issued? (Round your answer to the nearest cent.)
	Expected stock price per share    $

Answer 1

a.

Total amount of money raised is

$    10.00

million

Working:

Money raised upon right issue

=

Number of outstanding shares * Right issue ratio * Right issue price

=

8

million

*

1/4

*

$             5

=

$    10.00

million

b.

Expected stock price per share is

$       6.20

Working:

Expected stock price per share after rights are issued

=

((Outstanding shares before right issue*share price before right issue)+(Right shares issued * Right issue price))/(Outstanding shares before right issued + Right shares issued)

=

((8 million *$ 6.5)+(2 million*$ 5.0))/(8 million + 2 million)

=

$       6.20