Question
For short-answer questions, plz provide your answers and explanations. For numerical questions, plz show your work . Plz answer the whole question. Type it out
For short-answer questions, plz provide your answers and explanations. For numerical questions, plz show your work. Plz answer the whole question. Type it out and make sure it's correct plz. I WILL GIVE THUMBS UP!!!! THANKS!
Plz also check if I did d) correctly THANK YOU!!
The Windsor Corporation has 120,000 shares outstanding with a current market price of $8.10 per share. The company needs to raise an additional $36,000 to finance new expenditures, and has decided on a rights issue. The issue will allow current stockholders to purchase one additional share for 20 rights at a subscription price of $6 per share.
- How many new shares must be issued?
- What will be the ex-rights stock price?
- If the ex-rights price were set at $7.90, would you as a potential new stockholder choose to buy shares ex-rights or buy shares at the old price and exercise your rights?
- Suppose that the company was also considering structuring the rights issue to allow for an additional share to be purchased for 10 rights at a subscription price of $3. Prove that a stockholder with 100 shares would be indifferent between purchasing a new share for 10 rights at $3 or purchasing a new share for 20 rights at $6.
- Why do you think the company chose a rights issue rather than a general cash offer to raise new capital?
MY ANSWER FOR d)
Stock price ex-rights for 20 rights:
= (Market value of share prior to right issue+Cash received from right share issue)Number of shares
= ($8.1020+$6)(20+1)
= $8.00 per share
Market value = (20+5)$8 = $840
Stock price ex-rights 10 rights:
= (Market value of share prior to right issue+Cash received from right share issue)Number of shares
= ($8.1010+$3)(10+1)
= $7.64 per share
Market value = (100+10)$7.64 = $840
Hence, shareholder is indifferent between 2 plans
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