Question

Nemesis, Inc., has 225,000 shares of stock outstanding. Each share is worth $83, so the company’s market value of equity is $18,675,000. Suppose the firm issues 52,000 new shares at the following prices: $83, $77, and $71.

What will be the ex-rights price and the effect of each of these alternative offering prices on the existing price per share?

Answer 1

ex rights price = [(existing shares * existing price) + (new shares* new price)] / (existing shares + new shares)

now,

if new shares are issued at $83

=>[(225,000*$83)+(52,000*83)] (225,000 +52,000)

=>[18,675,000+4,316,000] / 277,000

=>$83.

if new shares are issed at $77

ex rights price =[(225,000*83)+(52,000*77)]/277,000

=>[(18,675,000+4,004,000]/277,000

=>$81.87.

if shares are issued at $71.

ex rights price =[(225,000*83) + (52,000*71)]/277,000

=>[18,675,000+3,692,000] / 277,000

=>$80.75.