Chapter 15, Problem 8QP

a)

Summary Introduction

To find: The effect of alternative offering price on the current price of a share

Introduction:

The loss in the present shareholders value in the terms of earnings per share, market value, book value, and ownership is termed as dilution.

Answer to Problem 8QP

• If the price of the share is $68, there is no change in the price of the ex-rights stock.
• If the price of the share is $65, there is a drop in price of the ex-rights stock.
• If the price of the share is $60, there is a drop in price of the ex-rights stock.

Explanation of Solution

Given information:

Company C has 175,000 outstanding shares. The worth of each share is $68, the firm’s market value of the equity is $11,900,000. The company issues 30,000 new shares for the following prices: $68, $65, and $60.

Compute the number of rights that are essential:

$\begin{array}{c}\text{Number of rights needed}=\frac{175,000\text{ of old shares}}{30,000\text{ new shares}}\\ =5.83\text{ rights per share}\end{array}$

Hence, the number of rights needed is 5.83 rights per share.

Formula to calculate the price for a share of the stock ex-rights:

$P_X=\frac{\left[N{P}_{RO}+P_S\right]}{\left(N+1\right)}$

N is the number of rights needed, $P_{RO}$ is the rights-on price, and $P_S$ is the subscription price.

The price of the share is $68:

$\begin{array}{c}{P}_X=\frac{\left[N{P}_{RO}+P_S\right]}{\left(N+1\right)}\\ =\frac{\left[5.83\left(\$68\right)+\$65\right]}{\left(5.83+1\right)}\\ =\frac{\$461.44}{6.83}\\ =\$67.56\end{array}$

Hence, there is no change in the price of the share.

b)

Summary Introduction

To find: The effect of alternative offering price on the current price of a share

Introduction:

The loss in the present shareholders value in the terms of earnings per share, market value, book value, and ownership is termed as dilution.

Answer to Problem 8QP

• If the price of the share is $68, there is no change in the price of the ex-rights stock.
• If the price of the share is $65, there is a drop in price of the ex-rights stock.
• If the price of the share is $60, there is a drop in price of the ex-rights stock.

Explanation of Solution

Given information:

Company C has 175,000 outstanding shares. The worth of each share is $68, the firm’s market value of the equity is $11,900,000. The company issues 30,000 new shares for the following prices: $68, $65, and $60.

Compute the number of rights that are essential:

$\begin{array}{c}\text{Number of rights needed}=\frac{175,000\text{ of old shares}}{30,000\text{ new shares}}\\ =5.83\text{ rights per share}\end{array}$

Hence, the number of rights needed is 5.83 rights per share.

Formula to calculate the price for a share of the stock ex-rights:

$P_X=\frac{\left[N{P}_{RO}+P_S\right]}{\left(N+1\right)}$

N is the number of rights needed, $P_{RO}$ is the rights-on price, and $P_S$ is the subscription price.

The price of the share is $65:

$\begin{array}{c}{P}_X=\frac{\left[N{P}_{RO}+P_S\right]}{\left(N+1\right)}\\ =\frac{\left[5.83\left(\$68\right)+\$65\right]}{\left(5.83+1\right)}\\ =\frac{\$461.44}{6.83}\\ =\$67.56\end{array}$

Hence, there is a drop in the price by $0.44 per share.

c)

Summary Introduction

To find: The effect of alternative offering price on the current price of a share

Introduction:

The loss in the present shareholders value in the terms of earnings per share, market value, book value, and ownership is termed as dilution.

Answer to Problem 8QP

• If the price of the share is $68, there is no change in the price of the ex-rights stock.
• If the price of the share is $65, there is a drop in price of the ex-rights stock.
• If the price of the share is $60, there is a drop in price of the ex-rights stock.

Explanation of Solution

Given information:

Company C has 175,000 outstanding shares. The worth of each share is $68, the firm’s market value of the equity is $11,900,000. The company issues 30,000 new shares for the following prices: $68, $65, and $60.

Compute the number of rights that are essential:

$\begin{array}{c}\text{Number of rights needed}=\frac{175,000\text{ of old shares}}{30,000\text{ new shares}}\\ =5.83\text{ rights per share}\end{array}$

Hence, the number of rights needed is 5.83 rights per share.

Formula to calculate the price for a share of the stock ex-rights:

$P_X=\frac{\left[N{P}_{RO}+P_S\right]}{\left(N+1\right)}$

N is the number of rights needed, $P_{RO}$ is the rights-on price, and $P_S$ is the subscription price.

The price of the share is $60:

$\begin{array}{c}{P}_X=\frac{\left[N{P}_{RO}+P_S\right]}{\left(N+1\right)}\\ =\frac{\left[5.83\left(\$68\right)+\$60\right]}{\left(5.83+1\right)}\\ =\frac{\$456.44}{6.83}\\ =\$66.83\end{array}$

Hence, there is a drop in the price by $1.17 per share.