Question

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 $49 to 47.60($49 is the rights-on price; $47.60 is the ex-rights price, also known as when issued price). The company is seeking 16.5 Million in additional funds with a per-share subscription price equal to $34. 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.)

Answer 1

Number of additional shares to be issued = 16500000/34
47.60 = (x*49+16500000)/(x+16500000/34)
Where x = the number of shares currently outstanding
Solving for x
47.60*x+16500000*47.6/34 = x*49+16500000
1.4x = 16500000*47.6/34-16500000 = 6600000/1.4 = 4714286
CHECK FOR EX-RIGHTS PRICE:
Ex-rights price = (49*4714286+16500000)/(4714286+16500000/34) =	$              47.60