Question

Suppose you own 64.000 shares of common stock in a firm with 3.2 milion total shares outstanding. The firm announces a plan to sell an additional 16 million shares through a rights offering, The market value of the stock is $33 before the rights offering and the new shares are being offered to existing shareholders at a $3 discount a. If you exercise your preemptive rights, how many of the new shares can you purchase? b. What is the market value of the stock after the rights offering? (Enter your answer in millions rounded to 1 decimal place. (e.g.. 32.1) c-1. What is your total investment in the firm after the rights offering? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. (e.g 32.16) c-2. If you exercise your preemptive right how many original shares and how many new shares do you have? d-1. If you decide not to exercise your preemptive rights, what is your investment in the firm after the nghts offering? (Do not ro d intermediate calculations. Enter your answer in millions rounded to 3 decimal places. (e.g.. 32.161) d-2. If you sell your rights rather than use them, how much money will you receve from the rights sale and what is the total value of your proceeds from the sale of the rights offering plus your investment in the firm? (Enter your answer in millions rounded to 3 decimal places. (e.g.. 32.161) New shares Market value a. million Total investment million c2 Original sharesi New shares d-1 Investment million d-2 Sale of rights Total investment

Answer 1

a]

The current shares outstanding is 3.2 million, and 1.6 million additional shares are offered.

3.2 million / 1.6 million = 2.

There is 1 share being offered for every 2 shares held.

If you hold 64,000 shares, the number of shares you can purchase = 64,000 / 2 = 32,000.

b]

market value of stock = (shares outstanding before offering * market price before offering) + (additional shares offered * offer price)

Offer price = $33 * (1 - 3%) = $32.01

market value of stock = (3.2 million * $33) + (1.6 million * $32.01)

market value of stock = $156.81 million

c-1]

Total investment = (shares held before offering * market price before offering) + (additional shares bought * offer price)

Total investment = (64,000 * $32) + (32,000 * $32.01)

Total investment = $3.14 million

c-2]

Original shares = 64,000

New shares = 32,000