Question

A company currently has 150k shares outstanding, selling at $64 per share. The firm intends to raise $565k 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 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 $649k. 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 17.09% 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
% 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

Market price= $64

Capital to be raised= $565k

Discount percentage= 37%

So the right issue price= $64x(100-37)%= $40.32

Here the percentage change in dollar value of one right is 37%.

Now, the fall in stok price= 17.09%

So, the new stock price= $64x(100-17.09)%=$53.0624

Now, the revised right issue price after further discount of 37% is given by

Revised price= $53.0624x(100-37)%=$33.4293

So, the overall percentage change is (40.32-33.4293/40.32)x100= 17.09%

But if you see the actual previous market price and the revised issue price, then the percentage difference is (64-33.4293/64)x100= 47.7667= 47.77%