Question

Red Shoe 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 $54 to $50.60 ($54 is the rights-on price; $50.60 is the ex-rights price, also known as the when-issued price). The company is seeking $18 million in additional funds with a per-share subscription price equal to $22.

How many shares are there currently, before the offering?

Answer 1

No of shares Ex-Right using the formula:

PX = $50.60 = [N($54) + $22]/(N + 1)

$50.60N + $50.60 = $54N +$22

$54N-$50.60N = $50.60- $22

$3.40N = $28.60

N = 8.4118

The number of new shares is the amount raised divided by the per-share subscription price, so:

Number of new shares = $18,000,000/$22 = 818,181.8181

And the number of old shares is the number of new shares times the number of shares ex-rights, so:

Number of old shares = 8.4118(818,181.8181) = 6,882,382

Note: please take note due to rounding there may be difference in final answers.