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CHAPTER 15
RAISING CAPITAL
Answers to Concepts Review and Critical Thinking Questions
1. A company’s internally generated cash flow provides a source of equity financing. For a profitable
8. The evidence suggests that a nonunderwritten rights offering might be substantially cheaper than a
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Solutions to Questions and Problems
NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple
steps. Due to space and readability constraints, when these intermediate steps are included in this solutions
manual, rounding may appear to have occurred. However, the final answer for each problem is found
without rounding during any step in the problem.
Basic
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d. Before the offer, a shareholder will have the shares owned at the current market price, or:
3. Using the equation we derived in Problem 2, part c to calculate the price of the stock ex-rights, we can
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5. Using X to stand for the required sale proceeds, the equation to calculate the total sale proceeds,
including flotation costs is:
7. We need to calculate the net amount raised and the costs associated with the offer. The net amount
raised is the number of shares offered times the price received by the company, minus the costs
associated with the offer, so:
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8. The number of rights needed per new share is:
Intermediate
9. a. The number of shares outstanding after the stock offer will be the current shares outstanding, plus
the amount raised divided by the current stock price, assuming the stock price doesn’t change.
So:
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b. For the price to remain unchanged when the P/E ratio is constant, EPS must remain constant. The
new net income must be the new number of shares outstanding times the current EPS, which
gives:
10. The total equity of the company is total assets minus total liabilities, or:
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The earnings per share after the stock offer will be:
11. Using the P/E ratio to find the necessary EPS after the stock issue, we get:
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12. The number of new shares is the amount raised divided by the subscription price, so:
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14. The net proceeds to the company on a per share basis is the subscription price times one minus the
underwriter spread, so:
15. Using the equation for valuing a stock ex-rights, we find:
