Question

Left Turn, Inc., has 132,000 shares of stock outstanding. Each share is worth $90, so the company's market value of equity is $11,880,000. Required: (a) Suppose the firm issues 22,000 new shares at the price of $90, what will the effect be of this offering price on the existing price per share? (Do not round your intermediate calculations.) (b) Suppose the firm issues 22,000 new shares at the price of $84, what will the effect be of this offering price on the existing price per share? (Do not round your intermediate calculations.) (c) Suppose the firm issues 22,000 new shares at the price of $69, what will the effect be of this offering price on the existing price per share? (Do not round your intermediate calculations.)

Answer 1

a) 22000 shares @$90

New no. of shares = 22000 + 132000 = 154000 shares

New share price = (new shares x offer price + existing shares x existing price) / New no. of shares

or, New share price = (22000 x $90 + 132000 x $90) / 154000 = $90

Therefore, their is no change.

b) 22000 shares @$84

Same as above -

New share price = (22000 x $84 + 132000 x $90) / 154000 = $89.142857 or $89.14

Therefore, share price drops by $0.86.

c) 22000 shares @$69

New share price = (22000 x $69 + 132000 x $90) / 154000 = $87

Therefore, share price drops by $3.00.