You are the CFO of a company that has a market capitalization of $20 billion. The firm has 50 million shares outstanding, so the shares are trading at $400 per share. You need to raise $1 billion and have announced a rights issue. Each existing shareholder is sent one right for every share he or she owns. You have not decided how many rights you will require to purchase a share of new stock. You will require either 16 rights to purchase one share at a price of $320 per share, or 30 rights to purchase two new shares at a price of $300 per share. a)How much money is raised under 2 approaches? b)What are the new stock prices after the issuance (under 2 approaches) c)Will the existing shareholders exercise their rights to participate in the SEO? Justify your answer d) What is the dollar value of one issuance right for a shareholder who owns a single share of stock e) are the shareholders expected to be worse off with, better off with, or indifferent to the 2 approaches? Justify your answer

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
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You are the CFO of a company that has a market capitalization of $20 billion. The firm has 50 million shares outstanding, so the shares are trading at $400 per share. You need to raise $1 billion and have announced a rights issue. Each existing shareholder is sent one right for every share he or she owns. You have not decided how many rights you will require to purchase a share of new stock. You will require either 16 rights to purchase one share at a price of $320 per share, or 30 rights to purchase two new shares at a price of $300 per share.

a)How much money is raised under 2 approaches?

b)What are the new stock prices after the issuance (under 2 approaches)

c)Will the existing shareholders exercise their rights to participate in the SEO? Justify your answer

d) What is the dollar value of one issuance right for a shareholder who owns a single share of stock

e) are the shareholders expected to be worse off with, better off with, or indifferent to the 2 approaches? Justify your answer

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