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.

E.

Suppose that the company now decides to issue the new stock at $4 instead of $5 a share. How many new shares would it have needed to raise the same sum of money? (Enter your answer in millions rounded to 1 decimal place.)

f. What is the expected stock price under this new arrangement after the rights are issued? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

e.

Amount raised when price = 5 = number of shares outstanding*offer ratio*subscription price

=15*5*1/5=15 million

Shares issued when price = 5 = number of shares outstanding*offer ratio = 15*1/5 = 3mln

Number of shares to be issued if price = 4 = Amount raised when price is 5/new subscription price

=15/4=3.75mln

Additional shares issued = Number of shares to be issued if price = 4

- Shares issued when price = 5

=3.75-3 = 0.75mln

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

=(8*15+15)/(15+3.75)

=7.2