The O. Bama Company plans to increase its equity capital by the issue of new sha

Question

The O. Bama Company plans to increase its equity capital by the issue of new shares (SEO) with a subscription ratio of 4:1 (one new shares for four old ones). The current price of the shares is $32, the issue price for the new shares is $25.

1.How many new shares will be issued if the number of current shares is 8 million?

2.Main share holder H. Illary (HI), who has 30% of all shares before the SEO, does not have any cash at the moment. As a consequence, she wants to purchase as many shares as possible by selling a fraction of her subscription rights.How many new shares can HI purchase without raising any new cash? You can assume that theoretical prices will hold in practice.

Explanation / Answer

1.How many new shares will be issued if the number of current shares is 8 million?

one new shares for four old ones

8,000,000/4*1    =             2,000,000

2. Main share holder H. Illary (HI), who has 30% of all shares before the SEO, does not have any cash at the moment. As a consequence, she wants to purchase as many shares as possible by selling a fraction of her subscription rights. How many new shares can HI purchase without raising any new cash? You can assume that theoretical prices will hold in practice.

Theoretical Price              =             ((8,000,000 * $ 32) + (2,000,000 * $ 25))/(8,000,000+2,000,000)

                                                =             30.60

H. Illary (HI) subscription rights =             2,000,000 * 30% = 60,000

H. Illary (HI) will sell                         =             26979 shares @ 30.60     =             825,557.40

And she will purchase                    =             33021 shares @ 25           =             825,525.00

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