Question

FARO Technologies recently had 17M shares outstanding trading at $42 per share. Suppose the company announces its intention to raise $200M by selling new shares.

1. Based on the research studies regarding market signaling, what will be the gain or loss in market value on the announcement date? Enter in millions. Enter negative numbers with a – sign and positive numbers without a sign.

$ Blank 1. Fill in the blank, read surrounding text. M

2.What is the percentage of this expected gain or loss relative to the value of FARO’s existing equity value prior to the announcement? Round answer to the tenth place. Enter negative numbers with a – sign and positive numbers without a sign. (Hint: equity value is shares outstanding times the price per share)

Blank 2. Fill in the blank, read surrounding text. %

Answer 1

Part 1)

Based on the research studies regarding market signaling, new equity announcements cause a reduction in the stock price with an amount that is equal to 30% of the value of the equity proposed to be raised.

The value of gain or loss in the market value on the announcement date is calculated as below:

Loss in the Market Value = Value of New Issue*30% = 200*30% = $60 Million

Answer for Part 1) is -$60 million or -$60,000,000.

_____

Part 2)

The value of expected gain or loss relative to the value of FARO’s existing equity value prior to the announcement in percentage terms is determined as below:

Expected Loss Percentage = Loss in Market Value as Calculated in Part 1/Current Market Value of Equity*100

Substituting values in the above formula, we get,

Expected Loss Percentage = -60/(17*42)*100 = 60/714*100 = -8.40%

Answer for Part 2) is -8.40%