Pandora, Inc., makes a rights issue at a subscription price of $7 a share. One n
ID: 2650442 • Letter: P
Question
Pandora, Inc., makes a rights issue at a subscription price of $7 a share. One new share can be purchased for every four shares held. Before the issue there were 12 million shares outstanding and the share price was $8.
What is the total amount of new money raised? (Enter your answer in millions rounded to 1 decimal place.)
What is the expected stock price after the rights are issued? (Round your answer to 2 decimal places.)
Pandora, Inc., makes a rights issue at a subscription price of $7 a share. One new share can be purchased for every four shares held. Before the issue there were 12 million shares outstanding and the share price was $8.
Explanation / Answer
Answer for subpoint a:
Subscription price per share =$7.
Number of Shares before rights issue =12,000,000
Rights shares issue ratio is for every four shares one new share is issued.
Therefore new shares issued =12,000,000/4 =3,000,000
Total amount raised through rights issue =3,000,000 * $7 =$21,000,000.
Answer for subpoint b:
Expected market price after issue is calculated as follows:
Market value of the share before issue =$8.
Total market value of the shares =12,000,000 * $8 =$96,000,000--------(A)
Value of Shares raised through rights issue =$21,000,000---------(B)
Total value of shares after rights issue =A+B =$117,000,000-----------------(C)
Total number of shares outstanding =12,000,000+3,000,000 =15,000,000--------------(D)
Value per share after rights issue = C/D
=$117,000,000/15,000,000
=$7.80.
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