a)
To find: The company’s new market value.
Introduction:
The present or the newly quoted price for the market traded securities is the new market value. The new market value is mostly referred to as the price of the asset.
b)
To find: The number of rights that are associated with one of the shares
Introduction:
The public issue of securities, in which the securities are generally at an initial stage, offered to the owners or the existing shareholders of the company is a right offer. In the rights offering every shareholder of the company gets one right for each share the rights offer owns.
c)
To find: The price of the ex-rights.
Introduction:
The shares of the traded stock that no longer have the rights attached to it because they might have expired, been exercised, or transferred to another investor is an ex-right shares.
d)
To find: The value of a right
Introduction:
The mathematically computed value of the subscription right after the announcements of the offering and before the expiration of the rights is the value of rights.
e)
To find: The reason for the company to have a rights offering instead of a general cash offer
Introduction:
The cash offer is a type of public issue that makes the availability of the shares to the general public in an initial public offering.
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Fundamentals of Corporate Finance
- Do solve all three parts 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?arrow_forwardSuppose you own stock in a company. The current price per share is P25.00. Another company has just announced that it wants to buy your company and will pay P35.00 per share to acquire all the outstanding stock. Your company’s management immediately begins fighting off this hostile bid. Is management acting in the shareholders’ best interests? Why or why not?arrow_forwardMa3. Question 7 The PX exchange uses maker/taker pricing: orders that add liquidity receive a rebate of $0.001 per share; orders that take liquidity pay $0.002 per share. Sam just entered an order to buy 100 shares limit $20. This order goes into the book. Shortly thereafter Mona enters an order to sell 100 shares, limit $19. a. What is the price paid by Sam net of maker-taker pricing? b. What is the price received by Mona net of maker-taker pricing?arrow_forward
- Consider the following information for the two companies, SpaceC and Alexa: SpaceC Alexa Shares outstanding 100 50 Price per share $50 $30 SpaceC is considering acquiring Alexa. It estimates that in doing so the synergistic benefit would be $200. Alexa says that it would accept an offer to be sold at $35 per share. Should SpaceC proceed and purchase Alexa? At what price would SpaceC be indifferent to making the acquisition of Alexa? Assuming the acquisition was at $35, what level of synergies (not $200) would there have to be to make the acquisition make sense for SpaceC? ( explain perfectly with step by step and type the answers) .arrow_forward4. IPO Underpricing [LO3] The Woods Co. and the Spieth Co. have both announced IPOS at $40 per share. One of these is undervalued by $9, and the other is overvalued by $4, but you have no way of knowing which is which. You plan to buy 1,000 shares of each issue. If an issue is underpriced, it will be rationed, and only half your order will be filled. If you could get 1,000 shares in Woods and 1,00o shares in Spieth, what would your profit be? What profit do you actually expect? What principle have you illustrated?arrow_forwardSaved ped Suppose you own 60,000 shares of common stock in a firm with 3 million total shares outstanding. The firm announces a plan to sell an additional 1.2 million shares through a rights offering. The market value of the stock is $35 before the rights offering and the new shares are being offered to existing shareholders at a $5 discount. a. If you exercise your preemptive rights, how many of the new shares can you purchase? b. What is the market value of the stock after the rights offering? (Enter your answer in millions rounded to 1 decimal place. (e.g., 32.1)) c-1. What is your total investment in the firm after the rights offering? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. (e.g., 32.16)) c-2. If you exercise your preemptive right how many original shares and how many new shares do you have? d-1. If you decide not to exercise your preemptive rights, what is your investment in the firm after the rights offering? (Do not…arrow_forward
- A company is considering a rights issue of one new share for every three shares held, at a price of £4.60. The existing shares have a nominal value of 1p, a book value of £2.75, and a market value of £5. What is the theoretical ex-rights price? a. £5.00 b. £4.90 c. £3.90 d. £3.21arrow_forwardb. Suppose Cumma Technology stock currently trades for $10.74 per share. What arbitrage opportunity is available? What assumptions are necessary to exploit this opportunity? If Cumma Technology stock currently trades for $10.74 per share, an example of an arbitrage opportunity that exists today which requires no future cash flow obligations would be: (Select from the drop-down menus and round to two decimal places. Sell million shares of current price of $ and borrow $ at the current price of $ million. and buy million shares of at thearrow_forwardSuppose a company whose shares are trading at $20 per share becomes a target of a tender offer and the suitor is prepared to pay $28 per share. You run a valuation and concludes that a fair valuation of the company would be $1 billion. If the company has 40 million shares outstanding, explain briefly the possible reason(s) for the suitor to offer that price?arrow_forward
- Effects of a Stock Exchange [LO3] Consider the following premerger information about Firm A and Firm B: Total earnings Shares outstanding Price per share Firm A $4,350 1,600 $ 43 Firm B $1,300 400 $ 47 Assume that Firm A acquires Firm B via an exchange of stock at a price of $49 for each share of B's stock. Both Firm A and Firm B have no debt outstanding. a. What will the earnings per share (EPS) of Firm A be after the merger? b. What will Firm A's price per share be after the merger if the market incorrectly analyzes this reported earnings growth (that is, the price-earnings ratio does not change)? c. What will the price-earnings ratio of the postmerger firm be if the market cor- rectly analyzes the transaction? d. If there are no synergy gains, what will the share price of Firm A be after the merger? What will the price-earnings ratio be? What does your answer for the share price tell you about the amount Firm A bid for Firm B? Was it too high? Too low? Explain.arrow_forwardWhat about for these? (b) Suppose you have purchased some GameStop shares on margin at $5per share. You ask your broker to put in a limit sell order at $7, anda stop loss order at $4.50.i. What will happen if the stock price falls to $4.50?ii. What will happen if the stock price rises to $7?iii. Now suppose you had instead short-sold your GameStop shares(as in the first part of the question). What instructions mightyou give to your broker to minimise your losses and lock in yourgains?arrow_forwardAssume perfect markets. TMX Corporation has 4 million shares outstanding and a share price of $50 per share. TMX wants to repurchase 1 million shares. What would be the share price immediately after they repurchase the shares? $37.50 $50.00 $66.67arrow_forward
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