Kristy Fashions Inc. has 4.5 million shares of common stockoutstanding. The curr
ID: 2662634 • Letter: K
Question
Kristy Fashions Inc. has 4.5 million shares of common stockoutstanding. The current market price of Kristy Fashionscommon stock is $60 per share rights-on. The company's netincome this year is $18 million. A rights offering has beenannounced in which 450,000 new shares will be sold at $55 pershare. The subscription price of $55 plus 10 rights is neededto buy one of the new shares. a. What are the earnings per share and price-earningsratio before the new shares are sold via the rights offering? b. What would the earnings per share be immediately after therights offering? What would the price earnings ratio be immediatelyafter the rights offering? (assume there is no change in the marketvalue of the stock, except for the change that occurs when thestock begins trading ex-rights.) Round all answers to two places tothe right of the decimal. Kristy Fashions Inc. has 4.5 million shares of common stockoutstanding. The current market price of Kristy Fashionscommon stock is $60 per share rights-on. The company's netincome this year is $18 million. A rights offering has beenannounced in which 450,000 new shares will be sold at $55 pershare. The subscription price of $55 plus 10 rights is neededto buy one of the new shares. a. What are the earnings per share and price-earningsratio before the new shares are sold via the rights offering? b. What would the earnings per share be immediately after therights offering? What would the price earnings ratio be immediatelyafter the rights offering? (assume there is no change in the marketvalue of the stock, except for the change that occurs when thestock begins trading ex-rights.) Round all answers to two places tothe right of the decimal.Explanation / Answer
Stock o/standing = 4.5M Net Income E = $18Ma. EPS = Net Incme/Stock outstanding = 18M/4.5M = $4 pershare P/E Ratio = Price / EPS = 60/4 = 15
b. Post rights issue, Stock outstanding = 4.5M + 450,000 =4.95M EPS = Net Incme/Stock outstanding = 18M/4.95M = $3.64 pershare
Now we need to calculate the price of the stock after theissue and after the new shares have been sold. To do this wemake some assumptions. Notably we assume that the everyone willexercise their rights and more importantly that the investmentopportunities will not change and further that the rights issuancedoes not change the operations of the firm. If this is true,then pricing is quite simple:
Overall equity value after issuance = Equity value beforeissuance + amount raised = (shares * Price) + amount raised = 4.5M* $60 + 450,000 * $55 = $270M + $24.75M =$294.75M
Total number of shares (post issuance) =Number of sharesoutstanding before the issuance + new shares issued = 4.5M + 450,000 = 4.95M
Price per share = new total market value / new number ofshares = $294.75M /4.95M = $59.55 Now we need to calculate the price of the stock after theissue and after the new shares have been sold. To do this wemake some assumptions. Notably we assume that the everyone willexercise their rights and more importantly that the investmentopportunities will not change and further that the rights issuancedoes not change the operations of the firm. If this is true,then pricing is quite simple:
Overall equity value after issuance = Equity value beforeissuance + amount raised = (shares * Price) + amount raised = 4.5M* $60 + 450,000 * $55 = $270M + $24.75M =$294.75M
Total number of shares (post issuance) =Number of sharesoutstanding before the issuance + new shares issued = 4.5M + 450,000 = 4.95M
Price per share = new total market value / new number ofshares = $294.75M /4.95M = $59.55 P/E Ratio = $59.55/$3.64 = 16.36
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