Question

Left Turn, Inc., has 96,000 shares of stock outstanding. Each share is worth $80, so the company's market value of equity is $7,680,000.

(a)	Suppose the firm issues 16,000 new shares at the price of $80, what will the effect be of this offering price on the existing price per share? (Do not round your intermediate calculations. A) 0.00 B) 16.50 C) -0.25 D) 32.00 E) 0.25

(b)	Suppose the firm issues 16,000 new shares at the price of $73, what will the effect be of this offering price on the existing price per share? (Do not round your intermediate calculations.) A) 14.60 B) -0.95 C) -1.05 D) -1.00 E) 30.60

(c)	Suppose the firm issues 16,000 new shares at the price of $58, what will the effect be of this offering price on the existing price per share? (Do not round your intermediate calculations.) A) 11.60 B) 27.60 C) -3.14 D) -2.99 E) -3.30

Answer 1

The number of rights needed per new share is:

Number of rights needed = 96,000 old shares/16,000 new shares = 6 rights per new share.

Using P_RO as the rights-on price, and P_S as the subscription price, we can express the price per share of the stock ex-rights as:

P_X = [NP_RO + P_S ] / (N+ 1)

a) P_X= [6 ($80) + $80]/(6 + 1) = $80.00; No change

Answer = A) 0.00

b) P_X= [6 ($80) + $73]/(6 + 1) = $79.00; Price drops by $1.00 per share

Answer = D) -1.00

c) P_X= [6 ($80) + $58]/(6 + 1) = $76.86;  Price drops by $3.14 per share

Answer = C) -3.14