Question

Jekyll 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 $26 to $24.10 ($26 is the rights-on price; $24.10 is the ex-rights price, also known as the when-issued price). The company is seeking $15 million in additional funds with a per-share subscription price equal to $12.

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.) (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Answer 1

Use the following steps to calculate the number of shares before the offering. Step 1: Calculate the number of shares that the company will require to raise $15 million or $15,000,000 as follows: Additional fund Number of shares = Subscription price $15,000,000 $12 = 1,250,000 shares The number of shares is 1,250,000 shares. Step 2: calculate the number of shares before the right offering as follows: Market cap before offering + Gross proceeds from offering Ex right price == Number of shares before offering + Number of shares offered ($26 x Number of shares before offering )+ $15,000,000 $24.10 = Number of shares before offering +1,250,000 Let Number of shares before offering be X $24.10 X + $30,125,000 = ($26x X)+$15,000,000 1.9X = $15,125,000 X = 7,960,526 shares Therefore, the number of shares before the right offering is 7,960,526 shares