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 $140 to $126 ($140 is the rights-on price; $126 is the ex-rights price,also known as the when-issued price). The company is seeking $20 million in additional funds with a per-share subscription price equal to $70. 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.)

Multiple Choice

• 1,097,143

• 1,142,857

• 1,200,000

• 1,188,571

• 213,333

Answer 1

Solution:-

First we nee to calculate Number of New shares-

Number of New Shares =

Number of New Shares =

Number of New Shares = 2,85,714.286 Shares

To Calculate Number of shares Ex-Rignt-

126 (N+1) = 140N + 70

126N + 126 - 70 = 140N

56 = 140N - 126N

56 = 14N

N = 4

To calculate that how much shares are their currently before offering-

Number of Old Shares = Number of New shares * Number of shares Ex-Right

Number of Old Shares = 2,85,714.286 * 4

Number of Old Shares = 11,42,857.

Hence, The correct Answer is point B i.e 11,42,857.

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