Question

A company currently has 137k shares outstanding, selling at $60 per share. The firm intends to raise $551k through a rights offering. Management suggests that a discount cannot fall below 11% as outlined in the previous issue, to which existing shareholders did not respond with much enthusiasm. They believe that a 36% 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 $673k. 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 22.68% and increased capital requirements by 54%.

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 36% discount offer which was simultaneously taking place.

Answer 1

A company currently has 137k shares outstanding, selling at $60 per share. The firm intends to raise $551k through a rights offering.