Question

A company currently has 106k shares outstanding, selling at $54 per share. The firm intends to raise $605k through a rights offering. Management suggests that a discount cannot fall below 10% as outlined in the previous issue, to which existing shareholders did not respond with much enthusiasm. They believe that a 39% 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 $647k. 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 18.99% and increased capital requirements by 55%.

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 39% 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

Solution:

Given Data:

Selling Rate per Share = $ 54,

Stock Price among the Immediate Consequences = $ 18.99 %

Calculation of Right Share Issue Price Before and After the Consequence:-

Particulars	Before the Consequence	After the Consequence
Current Stock Price	54.00	54.00
Fall IN stock Price by 18.99 %	NA	10.25
Stock Price relevant for applying discount on the right share	54.00	43.75
Discount for right share @ 39%	21.06	17.06
Right Share Price	32.94	26.68

% Change in Dollar Value of One Right Share price

= (32.94 - 26.68) / 32.94,

= 6.26 / 32.94 ,

= 18.99 %

% Change in Dollar Value of One Right Share price is 18.99.

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