FIN 1ABC Trading wants to raise equity to fund an acquisition of a small company (XYZ). ABC is considering two choices: (i) using an underwriting syndicate, (ii) a rights offering. The price of ABC stock is $60 and there are 250 million shares outstanding. (a) If ABC agrees to pay 3% to an underwriter to issue the stock, what are the net proceeds to the company if it sells 20 million shares to the public for $60 each? (b) ABC issues a rights offer to its existing stockholders that lets them purchase stock at the price of $58 each. (Note: stockholders will receive one right for each 12.5 shares they own, so only 20 million shares can be issued). What are the net proceeds to the company if it sells 20 million shares using the rights offering? (c) What is the market value of the firm in (a), (b) (ignoring information effects)? (d) What is the expected information effect from the company announcing it is issuing equity to fund acquisitions?

Question
Asked Nov 14, 2019
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FIN 1

  1. ABC Trading wants to raise equity to fund an acquisition of a small company (XYZ). ABC is considering two choices: (i) using an underwriting syndicate, (ii) a rights offering. The price of ABC stock is $60 and there are 250 million shares outstanding.

 

(a) If ABC agrees to pay 3% to an underwriter to issue the stock, what are the net proceeds to the company if it sells 20 million shares to the public for $60 each?

 

(b) ABC issues a rights offer to its existing stockholders that lets them purchase stock at the price of $58 each. (Note: stockholders will receive one right for each 12.5 shares they own, so only 20 million shares can be issued). What are the net proceeds to the company if it sells 20 million shares using the rights offering?

 

(c) What is the market value of the firm in (a), (b) (ignoring information effects)?

 

(d) What is the expected information effect from the company announcing it is issuing equity to fund acquisitions?

 

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Expert Answer

Step 1

“Since you have posted a question with multiple sub-parts, we will solve first three sub-parts for you. To get remaining sub-part solved please repost the complete question and mention the sub-parts to be solved.”.

Step 2

Solution (a):
We are provided with the values of the number of shares issued, offer price, underwriting spread rate, we can determine the net proceeds using the steps below:

Step 3
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Net proceeds-Gross proceeds-Underwriting fee Net proceeds is calculated as: (Number of shares issued) x (Offer price) (Gross proceeds) x (Underwriting spread rate

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