P15-8 Price Dilution [LO3] Left Turn, Inc., has 132,000 shares of stock outstand
ID: 2547456 • Letter: P
Question
P15-8 Price Dilution [LO3] Left Turn, Inc., has 132,000 shares of stock outstanding. Each share is worth $110, so the company's market value of equity is $14,520,000. Required: (a)Suppose the firm issues 22,000 new shares at the price of $110, what will the effect be of this offering price on the existing price per share? (Do not round your intermediate calculations.) (Click to select) (b)Suppose the firm issues 22,000 new shares at the price of $99, what will the effect be of this offering price on the existing price per share? (Do not round your intermediate calculations.) (Click to select) (c)Suppose the firm issues 22,000 new shares at the price of $75, what will the effect be of this offering price on the existing price per share? (Do not round your intermediate calculations.) (Click to select)Explanation / Answer
note:
price per share after new issue = [(existing price per share * number of shares) + (issue price per share * issued shares) ] / (existing shares + issued shares)
a.22,000 new shares at $110.
new price per share = [ ($110*132,000) + ($110*22,000)] / (132,000+22,000)
=>$16,940,000 / 154,000
=>$110 per share.
This offer will have NO EFFECT on the existing price of share.
d.22,00 shares @$99.
[($110*132,000) + ($99*22,000)] / (132,000 + 22,000)
=>$16,698,000 / 154,000
=>$108.43 per share.
This offering will DILUTE the existing price per share by ($110-$108.43) =>$1.57.
c.22,000 shares @$75.
[($110*132,000) + ($75*22,000)] / (132,000+22,000)
=>$16,170,000 / 154,000
=>$105.
This issue will DILUTE the existing stock price by ($110 - $105) =>$5.
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