Question

A company currently has 149k shares outstanding, selling at $55 per share. The firm intends to raise $572k 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 37% 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 $665k. 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 15.67% and increased capital requirements by 62%.

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 37% discount offer which was simultaneously taking place.

Answer 1

Given That

selling rate at $55 per share

immediate consequences were a fall in stock price by 15.67%

lets determine by how much did the dollar value of one right change before and after the consequences

Percentage Change in $dollar Value of 1 Right Share price is ==> (34.68 - 29.23) / 34.68

==> 5.45 / 34.68

==> 15.71%

In percentage terms, the dollar value of one right is 15.71%