Question

Nemesis, Inc., has 107,000 shares of stock outstanding. Each share is worth $62, so the company’s market value of equity is $6,634,000. Suppose the firm issues 20,000 new shares at the following prices: $62, $59, and $54.

What will be the ex-rights price and the effect of each of these alternative offering prices on the existing price per share? (Leave no cells blank; if there is no effect select "No change" from the dropdown and enter "0". Round your answers to 2 decimal places, e.g., 32.16.)

Answer 1

		price ex-rights	effect	amount
a.	$62	$62	no change	$0 per share
b.	$59	$61.53	decrease	$0.47 per share
c.	$54	$60.74	decrease	$1.26 per share.

working:

ex rights share price =[ (existing share price * number of shares) + (worth of new share*number of new shares)] / (existing shares + new shares)

when offer price is $62

=> [($62*107,000) + ($62*20000)] / (107,000+20,000)

=>7874000/127000

=>$62.

when price is $59.

[(62*107,000)+(59*20,000)] / 127,000

=>7814000/127000

=>$61.53

so there is a reduction by 62-61.53 =>0.47.

when price is $54.

[(62*107,000) + (54*20,000)] / 127,000

=>6742000/127000

=>$60.74.

so there is reduction by 62 - 60.74 =>$1.26