Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 15, Problem 3QP
Rights [LO4] Red Shoe 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 $51 to $49.30 ($51 is the rights-on price; $49.30 is the ex-rights price, also known as the when-issued price). The company is seeking $17 million in additional funds with a per-share subscription price equal to $35. 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.)
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[multiple choice questions]
INDO Inc. always pays all of its earnings as dividends, and therefore has no retained earnings. The same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity. The targeted capital structure consists of: common stock, preferred stock, and debt. Which of the following events will reduce WACC?
a. The market risk premium is decreasing.
b. Flotation costs associated with issuing new common stock increase.
c. The company's beta is increasing.
d. Inflation is expected to increase.
e. The flotation costs associated with issuing preferred stock increase.
Solve c) and d)
1. Rights Offerings [LO4] Leah, Inc., is proposing a rights
offering. Presently there are 375,000 shares outstanding at
$67 each. There will be 50,000 new shares offered at $58
each.
a. What is the new market value of the company?
b. How many rights are associated with one of the new
shares?
c. What is the ex-rights price?
d. What is the value of a right?
e. Why might a company have a rights offering rather than a
general cash offer?
Chapter 15 Solutions
Fundamentals of Corporate Finance
Ch. 15.1 - Prob. 15.1ACQCh. 15.1 - Prob. 15.1BCQCh. 15.2 - What are the basic procedures in selling a new...Ch. 15.2 - What is a registration statement?Ch. 15.3 - Prob. 15.3ACQCh. 15.3 - Why is an initial public offering necessarily a...Ch. 15.4 - Prob. 15.4ACQCh. 15.4 - Prob. 15.4BCQCh. 15.5 - Prob. 15.5ACQCh. 15.5 - Suppose a stockbroker calls you up out of the blue...
Ch. 15.6 - What are some possible reasons why the price of...Ch. 15.6 - Explain why we might expect a firm with a positive...Ch. 15.7 - What are the different costs associated with...Ch. 15.7 - What lessons do we learn from studying issue...Ch. 15.8 - Prob. 15.8ACQCh. 15.8 - What questions must financial managers answer in a...Ch. 15.8 - Prob. 15.8CCQCh. 15.8 - When does a rights offering affect the value of a...Ch. 15.8 - Prob. 15.8ECQCh. 15.9 - What are the different kinds of dilution?Ch. 15.9 - Is dilution important?Ch. 15.10 - What is the difference between private and public...Ch. 15.10 - Prob. 15.10BCQCh. 15.11 - What is shelf registration?Ch. 15.11 - Prob. 15.11BCQCh. 15 - Prob. 15.1CTFCh. 15 - Smythe Enterprises is issuing securities under...Ch. 15 - Prob. 15.4CTFCh. 15 - Prob. 15.7CTFCh. 15 - Debt versus Equity Offering Size [LO2] In the...Ch. 15 - Debt versus Equity Flotation Costs [LO2] Why are...Ch. 15 - Bond Ratings and Flotation Costs [LO2] Why do...Ch. 15 - Underpricing in Debt Offerings [LO2] Why is...Ch. 15 - Prob. 5CRCTCh. 15 - Prob. 6CRCTCh. 15 - Prob. 7CRCTCh. 15 - Prob. 8CRCTCh. 15 - Prob. 9CRCTCh. 15 - Prob. 10CRCTCh. 15 - Prob. 1QPCh. 15 - Prob. 2QPCh. 15 - Rights [LO4] Red Shoe Co. has concluded that...Ch. 15 - Prob. 4QPCh. 15 - Calculating Flotation Costs [LO3] The Valhalla...Ch. 15 - Prob. 6QPCh. 15 - Prob. 7QPCh. 15 - Prob. 8QPCh. 15 - Dilution [LO3] Eaton, Inc., wishes to expand its...Ch. 15 - Prob. 10QPCh. 15 - Dilution [LO3] In the previous problem, what would...Ch. 15 - Prob. 12QPCh. 15 - Value of a Right [LO4] Show that the value of a...Ch. 15 - Prob. 14QPCh. 15 - Prob. 15QPCh. 15 - Prob. 1MCh. 15 - Prob. 2MCh. 15 - Prob. 3MCh. 15 - Prob. 4M
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- III. Free Cash Flow Valuation Goodyear Industries is considering going public but is unsure of a fair offering price for the company. The firm's CFO has gathered data for performing the valuation using the free cash flow valuation model. The firm's weighted average cost of capital is 11% and it has P1.5 million of debt at market value and P500,000 of preferred stock at its assumed market value. The estimated free cash flows over the next 5 years 2016 through 2020 are given below. Beyond 2020 to infinity, the firm expects its free cash flow to grow by 3% annually. 2016-P 250,00 2019-P 450,000 2017- 320,000 2020- 480,000 2018- 400,000 Required: Using the free cash flow valuation method, estimate the value of Goodyear Industries' entire company, the total value of Common Stock and the estimated value per share assuming the firm plants to issue 250,000 shares of common stock.arrow_forward5arrow_forward3. Rights [LO4] Red Shoe 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 $49 to $47.60 ($49 is the rights-on price; $47.60 is the ex- rights price, also known as the when-issued price). The company is seeking $16.5 million in additional funds with a per-share subscription price equal to $34. 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.)arrow_forward
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