Question

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 $36 to $34.20 ($36 is the rights-on price; $34.20 is the ex-rights price, also known as the when-issued price). The company is seeking $11 million in additional funds with a per-share subscription price equal to $25. 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 shares issued in rights offering = Funds required/Subscription price per share

= 11,000,000/25 = 440,000 shares

Let number of shares before offering be x

Ex rights price = (Price before rights*number of shares before rights + proceeds from right issue)/number of shares after right issue

34.20 = (36*x +11,000,000)/(x+440,000)

34.20x + 440,000*34.20 = 36x + 11,000,000

1.8x = 4,048,000

X = 2,248,888.89

Hence, number of shares before offering = 2,248,889