The Crandall corp cuurently has 100,000 shares outstanding that are selling at 5
ID: 2735060 • Letter: T
Question
The Crandall corp cuurently has 100,000 shares outstanding that are selling at 50.00 per share. It needs to raise 900,000. Net income after taxes is 500,000. Its vice president of finanace and its investement banker have decided on the rights offering, but are not sure how much to discount the subscription price from the current market value. Discounts of 10%, 20%, and 40% have been suggested. Common stock is the sole means of financing the corporation. a) For each discount, determine the subscription price, the number of shares to be issued, and the number of of rights required to purchase one share. (Round to one place affter the decimal point where necessary.) b) Determine the value of one right under each of the plans. (Round to two decimal places after the decimal point where necessary.) c) Compute the earnings per share before and immediately after the rights offerring under a 10% discount market price. d) By what percentage has the number of shares outstanding increased? e) Stockholder X has 100 shares before the rights offering and particapted by buying 20 new shares. Compute his total claim to earnings both before and after the rights offering (this is, mulitply shares by the earnings per share figures computed in part C) f) Should stockholder X be satisfied with this claim over a longer period of time?
Explanation / Answer
Crandall Corp.
a) For each discount, determine the subscription price, the number of shares to be issued, and the number of of rights required to purchase one share.
a.10% discount-subscription price equals $45
. Number of new shares
= Required funds /subscription price
$900,000/45
=20,000
Number of rights to purchase one share
= Old share/ New Share
=100000/20,000
=5
.20% discount-subscription price equals $40
. Number of new shares
= Required funds /subscription price
$900,000/40
=22500
Number of rights to purchase one share
= Old share/ New Share
=100000/22500
=4.4
40% discount-subscription price equals $30
Number of new shares
= Required funds /subscription price
$900,000/30
=30,000
Number of rights to purchase one share
= Old share/ New Share
=100000/30,000
=3.3
b) Determine the value of one right under each of the plans
R =Mo -S / N+1
10%
R = 50-45/ 5+1
=5/6
=$ 0.83
20%
R =50-40 / 4.4+1
=10/5.4
=$ 1.85
40%
R=50-30 /3.3+1
=20/4.3
=$4.65
c) Compute the earnings per share before and immediately after the rights offerring under a 10% discount market price.
EPS before rights offering = net income/old shares
=500,000 /100,000
=$5
EPS after rights offering= net income/(old + new shares)
=4.17=500,000(100,000+20,000)
d) By what percentage has the number of shares outstanding increased?
20% increase in shares outstanding (100,000 to 120,000)
e) Stockholder X has 100 shares before the rights offering and particapted by buying 20 new shares. Compute his total claim to earnings both before and after the rights offering (this is, mulitply shares by the earnings per share figures computed in part C)
Before 100 shares × $5.00 = $500
After120 shares × $4.17 = $500 (rounded)
f) Should stockholder X be satisfied with this claim over a longer period of time?
No, he would expect greater earnings. He and others have put additional capital into the corporation so total claims to earnings should improve. Invested capital has increased from $5,000,000to $5,900,000. He earned $500 before he put $900 more (20 shs.× $45) of additional funds in the corporation. Over time, earnings should increase.
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