The Rank and File Company is considering a rights issue to raise $50 million. An underwriter offers
Question:
The Rank and File Company is considering a rights issue to raise $50 million. An underwriter offers to “stand by” (i.e., to guarantee the success of the issue by buying any unwanted stock at the issue price). The underwriter’s fee is $2 million.
(a) What kind of option does Rank and File acquire if it accepts the underwriter’s offer?
(b) What determines the value of the option?
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Related Book For
Principles of Corporate Finance
ISBN: 978-0072869460
7th edition
Authors: Richard A. Brealey, Stewart C. Myers
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