Question

Red Shoe Co. has concluded that additional equity financing will be needed to expand operations and...

Red Shoe Co. has concluded that additional equity financing will be needed to expand operations and that the needed funds will be best obtained through a rights offering. It has correctly determined that as a result of the rights offering, the share price will fall from $42 to $39.20 ($42 is the rights-on price; $39.20 is the ex-rights price, also known as the when-issued price). The company is seeking $12 million in additional funds with a per-share subscription price equal to $30.

How many shares are there currently, before the offering? (Assume that the increment to the market value of the equity equals the gross proceeds from the offering.)

Homework Answers

Answer #1

Answer:

Given:

Market price before rights issue = $42

Ex-Rights Price = $39.20

Additional funds from rights issue = $12,000,000

Per-share subscription price equal = $30

Number of rights share issued = 12000000 / 30 = 400,000

Let us assume number of shares before the offering = X

Theoretical Ex-Rights Price = (Market Value of shares prior to rights issue + Additional funds from rights issue) / Number of shares after rights issue

Hence:

=> (42 * X + 12000000) / (X + 400000) = 39.20

=> 42X + 12000000 = 39.20X + 15680000

=> X = (15680000 - 12000000) / 2.8

=1,314,286

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