Red Shoe Co. has concluded that additional equity financing will be needed to ex

Question

Red Shoe Co. has concluded that additional equity financing will be needed to expand operations and that the needed funds will be best obtained through a rights offering. It has correctly determined that as a result of the rights offering, the share price will fall from $120 to $108 ($120 is the rights-on price; $108 is the ex-rights price,also known as the when-issued price). The company is seeking $11 million in additional funds with a per-share subscription price equal to $60. How many shares are there currently, before the offering? (Assume that the increment to the market value of the equity equals the gross proceeds from the offering.)

136,889 733,333 762,667 770,000

Explanation / Answer

Ex-eight price = $ 108

Using the formula to compute the ex-right price, We can calculate number of shares.

Let N denotes the number of shares a shareholder will have ex-right, whose calculation is as follows:-

108 = [N * 120 + 60 ] / N + 1

108 N + 108 = 120 N + 60

12 N = 48

   N = 4

Number of new shares = Additional funds raised / Per-share subscription value

   = 11000000 / 60

= 183333 (approx) [Shares can not be represented in decimals.]

Thus, the number of shares before right offering (Old Shares) = 183333 * 4 = 733332

Cconclusion:- There are currently 733,333 number of shares approx before the right offering.

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