Question

A company currently has 119k shares outstanding, selling at $58 per share. The firm intends to raise $629k through a rights offering. Management suggests that a discount cannot fall below 13% as outlined in the previous issue, to which existing shareholders did not respond with much enthusiasm. They believe that a 38% 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 $536k. 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 23.23% and increased capital requirements by 58%.

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 38% 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

Calculation of Right share price before & after the consequence :

Particulars	Before the consequence	After the consequence
Current stock price	58	58
Fall in stock price by 23.23%	NA	13.47
Stock Price relevant for applying discount on right share	58	44.53
Discount for right share @ 38%	22.04	16.92
Right Share Price	35.96	27.61

% change in  dollar value of one right change before and after the consequence = (35.96-27.61)/35.96 = 23.22%