1- Company Detox, is a private company that designs, manufactures and distribute

Question

1- Company Detox, is a private company that designs, manufactures and distributes certain consumer products. In this fiscal year, Detox had revenues of $38 Millions of USDs and earnings of $12 of Millions of USDs. Detox company has filed a registration statement with the SEC for its IPO. If the industry average Price/Earnings ratio and Price/Revenues ratio for the recent fiscal year were 12 and 0.9 respectively. Estimate the IPO price for Detox Company using the Price/Revenues ratio and assuming that they will issue 22 Million shares."

2- Consider the situation faced by the CFO of a company with a market capitalization of $400 Millions of USD, e.g. the firm has 30 million shares outstanding, so the shares are trading at $13.3333333333333 per share. The CFO needs to raise $100 Millions of USDs and announces a rights issue. Each existing shareholder is sent 8 right for every share he or she owns. The CFO has not decided how many rights will be required to purchase a share of new stock. At the current price per share, what is the maximum amount of rights the CFO can require stockholders for purchasing a share of new stock and so be able to raise the $100 Millions of USDs?"

Explanation / Answer

1: Price/Revenues ratio = Price per share/ Revenue per share

Hence 0.9= Price per share/ (38m/22m)

Price per share= 0.9*(38/22) = $1.5545

2: Current price= $13.3333

Amount to be raised= $100 million

Number of shares issued = $100,000,000/13.3333 =7.5m= 7,500,000

Present number of shares outstanding= 30 m

Rights to be exercised per share= 30/7.5 = 4 rights

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