Suppose that your company wants to raise additional money via a right offering. Currently, the value of the company is $10,000,000 and the price per share is $100. The company wants to raise $1,000,000. (a) Suppose that your company wants to avoid a large drop in price after the rights offering. In particular, it wants the ex-rights price to be $95. What should be the subscription price? How many additional shares should the company issue? (b) Compute the value of the right. How many rights are required to buy one share? (c) Suppose now that the firm decides to hire an investment bank as an underwriter to facilitate the process. Suppose that the underwriter charges a 2% fee for each dollar raised in the rights offering. Redo part (a), assuming that the ex-rights price is still $95. How does your answer change if, on top of the 2% fee, the underwriter requires a fixed payment of $10,000?
Suppose that your company wants to raise additional money via a right offering. Currently, the value of the company is $10,000,000 and the price per share is $100. The company wants to raise $1,000,000. (a) Suppose that your company wants to avoid a large drop in price after the rights offering. In particular, it wants the ex-rights price to be $95. What should be the subscription price? How many additional shares should the company issue? (b) Compute the value of the right. How many rights are required to buy one share? (c) Suppose now that the firm decides to hire an investment bank as an underwriter to facilitate the process. Suppose that the underwriter charges a 2% fee for each dollar raised in the rights offering. Redo part (a), assuming that the ex-rights price is still $95. How does your answer change if, on top of the 2% fee, the underwriter requires a fixed payment of $10,000?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Suppose that your company wants to raise additional money via a right offering. Currently, the value of the company is $10,000,000 and the price per share is $100. The company wants to raise $1,000,000.
(a) Suppose that your company wants to avoid a large drop in price after the rights offering. In particular, it wants the ex-rights price to be $95. What should be the subscription price? How many additional shares should the company issue?
(b) Compute the value of the right. How many rights are required to buy one share?
(c) Suppose now that the firm decides to hire an investment bank as an underwriter to facilitate the process. Suppose that the underwriter charges a 2% fee for each dollar raised in the rights offering. Redo part (a), assuming that the ex-rights price is still $95. How does your answer change if, on top of the 2% fee, the underwriter requires a fixed payment of $10,000?
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