Question

Pandora Box Company Inc. makes a rights issue at a subscription price of $5 a share. One new share can be purchased for every five shares held. Before the issue there were 15 million shares outstanding and the share price was $8.

a. What is the total amount of new money raised? (Enter your answer in millions.)

b. What is the expected stock price after the rights are issued? (Round your answer to 4 decimal places.)

c. By what percentage would the total value of the company need to fall before shareholders would be unwilling to take up their rights? (Do not round intermediate calculations. Enter your answer as a positive percent rounded to 2 decimal places.)

d. Suppose that you initially own 100 shares plus $100 in the bank. If you take up your rights issue, what will be your total wealth after the issue is completed? (Do not round intermediate calculations.)

Answer 1

a.

Amount raised = number of shares outstanding*offer ratio*subscription price

=15*1/5*5=15m

b. stock price after issued = (current market cap+amount raised)/(current shares+additional shares)

=(8*15+15)/(15+15*1/5)

=7.5

c.

if share price fall to subscription price then rights will be out of money

%age drop = (subscription price/current price)-1)*100

=(5/8-1)*100=-37.5%

d.

shares on offer for 100 shares = 100*1/5 = 20

amount needed to subscribe = share on offer *subscription price = 20*5 = 100

You will use all amount in bank to subscribe the rights

Wealth = price after rights issue*shares after subscribing to rights issue

=7.5*(100+20)=900