Question

A company currently has 106k shares outstanding, selling at $54 per share. The firm intends to raise $605k through a rights offering. Management suggests that a discount cannot fall below 10% as outlined in the previous issue, to which existing shareholders did not respond with much enthusiasm. They believe that a 39% discount offer is more appropriate. Also, the CEO is rejecting calls for raising capital through debt or preferred stock. Net earnings after taxes (EAT) are $647k. Furthermore, a recent corruption scandal involving a number of senior figures in the firm has come to light in the press; soon after the rights offering was announced – in other words, it was already too late. Among the immediate consequences were a fall in stock price by 18.99% and increased capital requirements by 55%.

Required: In percentage terms, determine by how much did the dollar value of one right change before and after the consequences described above, together with the 39% discount offer which was simultaneously taking place.

Answer% Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places (for example: 28.31%).

Note: The term “k” is used to represent thousands (× $1,000).

Answer 1

Less Per Share Share Price 54 Discount 21.06 Right Issue 32.94 No of shares to be raised through right issue for fund 18336 (604000/32.94) Theoretical ex-rights price (TERP) is the estimated price of a share of a company following a rights issue. It is usually estimated as the weighted average price per share of existing and the new shares. Rights issue is the issue of new shares for cash to the current shareholders of a company. Right shares are issued at a price slightly below the market price of shares prevailing at the time. This is done to encourage the existing shareholders to take up the shares and pay cash to the company. Therefore, theoretical ex-rights price is usually lower than the share price before the rights issue. Before Consequence Theoretical Ex-rights Price= 18336*32.94+ New Shares x Issue Price + Old Shares x Market Price (106000*54) 6327987.8 50.89 New Shares + Old Shares (18336+106000) 124336 After Corruption Scandal Less 17.06 26.7 Share Price 43.7 54*(100%-18.99%) Discount 39% Right Issue Theoretical Ex-rights Price= New Shares x Issue Price + Old Shares x Market Price New Shares + Old Shares Capital requirement increased by 55% No of shares to be issued through right issu 936200 (604000*1.55) 35064 (936200/26.7) 5572649 39.5 Theoretical Ex-rights Price= New Shares x Issue Price + Old Shares x Market Price New Shares + Old Shares 141064 -22% (39.5/50.89-1) % Change in Theoretical Ex-rights price following corruption scandal