Question

Nemesis, Inc., has 195,000 shares of stock outstanding. Each share is worth $77, so the company’s market value of equity is $15,015,000. Suppose the firm issues 40,000 new shares at the following prices: $77, $71, and $65.

What will be the ex-rights price and the effect of each of these alternative offering prices on the existing price per share? (Leave no cells blank; if there is no effect select "No change" from the dropdown and enter "0". Round your answers to 2 decimal places, e.g., 32.16.)

	Price Ex-Rights	Effect	Amount
a.					per share
b.					per share
c.					per share

Answer 1

Answer:

Issue Price = $77
If the issue price is $77, then the additional market value = 40,000 x $77 = $3,080,000
The total market value = $15,015,000 + $3,080,000 = $18,095,000
The new price per share = $18,095,000/(195,000 + 40,000) = $77
There is no impact on the existing price per share.

Issue Price = $71
If the issue price is $71, then the additional market value = 40,000 x $71 = $2,840,000
The total market value = $15,015,000 + $2,840,000 = $17,855,000
The new price per share = $17,855,000/(195,000 + 40,000) = $76
The price drops by $77 - $76 = $1 per share

Issue Price = $65
If the issue price is $65, then the additional market value = 40,000 x $65 = $2,600,000
The total market value = $15,015,000 + $2,600,000 = $17,615,000
The new price per share = $17,615,000/(195,000 + 40,000) = $75
The price drops by $77 - $75 = $2 per share