Question

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.)

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