Web Extension 18A
1. There are 10,000,000 shares outstanding of O’Connell Co.’s stock, which now sells for $50 per share. The company
plans to raise $100 million as new equity by selling common stock. Since the preemptive right is in the corporate charter,
rights will be used. Management has decided that the rights should be worth $1 each: Such a price would assure that most
stockholders would either exercise or sell their rights rather than just letting them expire, yet a careless failure to use the
rights would not impose too severe a hardship on anyone. What subscription price should O’Connell set for its offering to
obtain the desired price of the rights, and what will be the ex-rights stock price (Me), assuming the theoretical
relationships hold? (Hint: N = Number of old shares/Number of new shares; Number of new shares = Dollars to be
raised/Subscription price per share.)
Sub Price Ex-rights
a.
$39.65 $42.50
b.
$40.25 $43.50
c.
$42.65 $47.50
d.
$44.55 $49.00
e.
$46.65 $50.00
d
1
Difficulty: Moderate
INTE.GENE.16.119 – LO: 18A-1
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Subscription price and ex-rights price–nonalgorithmic
TYPE: Multiple Choice: Problem
Web Extension 18A
2. Pietersen Corporation must raise an additional $10,000,000 of equity capital through the sale of common stock in order
to finance the construction of a new plant. The firm currently has an EPS of $5.40 and a P/E ratio of 10, with 1,200,000
shares outstanding. The firm will offer new shares to its current stockholders at $40 per share. Find (1) the number of new
shares to be issued, (2) the ex-rights price of the stock (assuming that the new market value of the stock will simply be the
proceeds of the new issue plus the current value of equity, divided by new shares outstanding), and (3) the value of one
right.
New Shs Ex-rights Rights
a.
200,000 $39.65 $1.38
b.
230,000 $40.25 $1.85
c.
230,000 $42.65 $2.16
d.
250,000 $51.59 $2.41
e.
250,000 $46.65 $2.78
d
1
3. To finance the construction of a new plant, Pietersen Corporation must raise an additional $10,000,000 of equity capital
through the sale of common stock. The firm currently has an EPS of $5.40 and a P/E ratio of 10, with 1,200,000 shares
outstanding. If the firm wants its ex-rights price to be $50, what subscription price must it set on the new shares?
a.
$29.55
b.
$33.78
c.
$39.28
d.
$41.80
e.
$50.00
b
1
financing
financing
4. Ritzer Company has 1,000,000 shares of stock outstanding that sell for $90 per share. The company wants to sell stock
via a rights offering. The new issue will be used to raise $8 million of new equity, and existing shareholders will receive
one right per share held. Theoretically, if the subscription price is $80, (1) how many new shares must be sold, (2) how
many rights per share of new stock will be required, (3) what will the value of each right be, and (4) what will the stock
price be after the rights offering has been completed?
New Shs No. of Rights Value Ending Price
a.
100,000 8 $1.38 $88.62
b.
100,000 9 $1.05 $88.95
c.
100,000 10 $0.91 $89.09
d.
120,000 8 $1.05 $88.95
e.
120,000 10 $1.38 $88.62
1
INTE.GENE.16.119 – LO: 18A-1
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Rights offering–nonalgorithmic
TYPE: Multiple Choice: Problem
TYPE: Multiple Choice: Problem