Problem #6

Santa Claus is considering an equity issue to fund a new automatic stocking stuffer. This will require $20 million of new equity. Cheatem & Steele, Santas investment bankers are going to charge a fee of 8% of the funds raised, how large does this stock issue have to be? Also, what is the dollar amount of the flotation cost?

The Easter Bunny currently has 4 million shares outstanding. The stock sells for $25 a share. To raise $15 million for a new marshmallow peep recipe, the bunny is considering a rights offering at $20 a share. What is the value of the right in this case? What is the ex-rights price?