Question

Jekyll 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 $56 to $52.40 ($56 is the rights-on price; $52.40 is the ex-rights price, also known as the when-issued price). The company is seeking $28 million in additional funds with a per-share subscription price equal to $40. 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.) (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Number of old shares

Answer 1

Amount to be raised in additional equity financing = 28,000,000

Issue price of right shares = $40 per share

.

No. of right shares to be issued = 28,000,000/40

= 700,000 shares

.

Let the no. of old shares (i.e no. of shares before the offering) be x

.

Theoretical Ex-rights Price
=	New Shares × Issue Price + Old Shares × Market Price
	New Shares + Old Shares

.

.

Therefore,

52.40 = { (700,000*40) + (x*56) } / (700,000+x)

52.40*(700,000+x) = 28,000,000 + 56x

36,680,000 + 52.40x = 28,000,000 + 56x

56x – 52.40x = 36,680,000 - 28,000,000

3.60x = 8,680,000

x = 2,411,111 shares.

.

.

Therefore, no. of shares before the offering = 2,411,111 shares.