Question

Horus is now public and has 3.5 millions shares outstanding. It decides to launch an SEO with rights offering. You have the following information on the rights issue: - Number of rights needed to buy one share: 4. - SEO issue price: $12 Just after the ex-right date, you observe that rights trade at $1. What will be the value of Horus’ equity after the SEO? What was it before the SEO? (10 points)

Answer 1

Price of rights After SEO = (Market value of shares after SEO - Issued Price) / Number of Rights per share

1 = (Market value - 12) / 4

4 = Market value - 12

Market value = $ 16

New shares to be issued = Number of shares outstanding / No of rights per share

= 3,500,000/4 = 875,000 rights required.

Calculation of firm post SEO:

Firm Equity post SEO = Share market value * (Shares outstanding + New shares issued)

Firm Equity post SEO = 16 * (3,500,000 + 875,000)

Firm Equity post SEO = $ 70,000,000

Money required for rights $ 875000*12 = $ 10,500,000

Firm Equity pre SEO is 70,000,000(Post Equity) - 10,500,000 (Rights money) = $ 59,500,000.