Question

Wuttke Corp. wants to raise $3 million via a rights offering. The company currently has 400,000 shares of common stock outstanding that sell for $40 per share. Its underwriter has set a subscription price of $20 per share and will charge the company a spread of 4 percent. If you currently own 5,000 shares of stock in the company and decide not to participate in the rights offering, how much money can you get by selling your rights? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Solution : -

After tax Cost = 6% * ( 1 - 0.24 ) = 4.56%

In Case of Purchase =

Depreciation Every Year = $6,300,000 / 6 = $1,050,000

Now Depreciation tax shield every year = $1,050,000 * 24% = $252,000

In case of Lease Payment After tax Lease Payment = $1,260,000 * ( 1 - 0.24 ) = $957,600

Net Present Cost in case of Purchase

= - $6,300,000 + ( $252,000 ) * PVAF ( 4.56% , 6 )

= - $6,300,000 + ( $252,000 * 5.1479 )

= - $5,002,728.67

Net Present Cost in case of Lease

= - $957,600 * PVAF ( 4.56% , 6 )

= - $957,600 * 5.1479

= - $4,929,631.06

Now Net advantage to Lease (NAL)

= $5,002,728.67 - $4,929,631.06

= $73,097.61

If there is any doubt please ask in comments

Thank you please rate