Question

#1.

Check my Suppose you own 50,000 shares of common stock in a firm with 2.5 million total shares outstanding. The firm announces a plan to sell an additional 1 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. points eBook Print 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 rights offering? (Do not round 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 receive 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)) References a. b. C-1. C-2. million million New shares Market value Total investment Original shares New shares Investment Sale of rights Total investment d-1. d-2. million million million

Answer 1

Existing percentage of share holding is 2% (50000/2500000) so in new issue he can purchase 2% of new share issue as he has a preemptive right. (Preemptive rights are a clause that gives the investor the right to buy a proportionate number of shares of any future issue to maintain his percentage ownership in the company).

a New shares which can be purchased is 2% of 1 million which is equal to 20,000 shares

b Full 1 million new share are bought at $30 per share (as $3 is given as discount to Existing investor) so the company get $ 30 million additional capital. To calculate the new market value we add both the values which is $ 112.50 million

c.1 If we take right issue total investment in company after right offering is $ 2.25 million

c.2 Number of Original share 50,000 and New shares 20,000

d.1 If we do not exercise our right for new issue still the market value of share is $ 32.14 in that case our value of investment will be existing number of shares times new market value which is $ 1.61 million (50000*32.14)

d.2 to sell our right to other we need the selling price which we take as $ 30 per share so we will receive amount of 0.600 million (20000*30), so our total investment will be $ 1.007 million

working in excel

A 50,000 33 2 Current share holding 3 Current Market value per share 4 Total share outstanding 5 Existing percentage 25,00,000 2.00% '=B2/B4 10,00,000 30 20,000 *=B7*B5 2.00% =(B9+B2)/(B4+B7) to check our answer 7 New issue of shares 8 price of new issue 9 Number of new share purchased 10 New percentag shareholding 11 12 Existing Market value 13 New issue market value 14 Total Market value post issue 15 Total number of share post issue 16 New market value per share 17 Total investment 18 19 Invetment without new issue 20 21 Sale of right at $ 30 22 we get this amount 8,25,00,000 =B4*B3 3,00,00,000 *=B7*B8 11,25,00,000 =B12+B13 35,00,000 =B7+B4 32.143 =B14/B15 22,50,000 =(B9+B2) *B16 2.25 16,07,143 =B16*B2 6,00,000 =B9*30 0.600 23 10,07,143 =B19-B21 1.007 24 Total Value of investment = 25