Question

Red Shoe Co. has concluded that additional equlty 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 $120 to $96 ($120 is the rights-on price; $96 is the ex-rights price,also known as the when-issued price). The company is seeking $19 million In additional funds with a per-share subscription price equal to $60. 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.) 498.750 475,000 286,583 456,000 494,000

Answer 1

Answer: Correct answer is 475000
Number of new shares is calculated as:
Additional funds/Subscription price
=($19million)/60=19000000/60=316666.6667
So, the number of new shares=316666.6667

Now, the number of shares before the rights issue is calculated as:
Ex right price=(Market value)/(Total number of shares)
Suppose the shares outstanding be x.

Then,
96=(19000000 + 120x)/(x+316666.6667)
=>96*(x+316666.6667)=(19000000 + 120x)
=>96*x+96*316666.6667=19000000 + 120x
=>96*316666.6667-19000000 = 120x-96x
=>11400000 = 24x
=>11400000/24=x
=>x=475000
So, the shares outstanding is 475000