Question

Red Shoe Co. has concluded that additional equity financing will be needed to expand operations and...

Red Shoe Co. has concluded that additional equity financing will be needed to expand operations and that the needed funds will be best obtained through a rights offering. It has correctly determined that as a result of the rights offering, the share price will fall from $100 to $90 ($100 is the rights-on price; $90 is the ex-rights price,also known as the when-issued price). The company is seeking $15 million in additional funds with a per-share subscription price equal to $50. How many shares are there currently, before the offering? (Assume that the increment to the market value of the equity equals the gross proceeds from the offering.)


rev: 09_20_2012

1,260,000

1,248,000

1,200,000

1,152,000

224,000

Homework Answers

Answer #1

Let's say there are currently N shares of the company in the market

Total current market cap = N * Current Stock Price = 100N

Number of new shares issued = Additional Funds raised / Subscription price per share = 15000000/50 = 300,000

New share price = $90

Total number of shares outstanding after rights issue = N + 300000

New Market Cap = 90 * (N + 300000)

This should be equal to previous market cap + additional funds raised

90 * (N + 300000) = 100N + 15000000

10N = 27000000 - 15000000 = 12000000

N = 1200000 (i.e. 1.2mn)

Thus, total number of shares currently before the offering = 1.2 million

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