18. A firm has 20,000,000 shares of stock outstanding at a price of $40 per shar

Question

18. A firm has 20,000,000 shares of stock outstanding at a price of $40 per share. They gave each shareholder the right to buy .25 shares of stock for $7 (4 rights would give them the right to buy one share for $28. How much is each right worth?

a) $.83 b) $1.45 c) $1.94 d) $2.40

19. A firm has Net Income of 200,000 and 50,000 shares of common stock outstanding. However, they have 10,000 shares of Preferred Stock which received $2 per share in dividends. They also had warrants that can be converted into 20,000 shares of common stock for $25. Their current stock price is $30. They also have 600 bonds with a face value of 1,000 and a coupon rate of 6%. These bonds can be converted into15,000 shares of stock. Their marginal tax rate is 40%. What is their Primary EPS available to common shareholders?

a) $2.37 b) $3.38 c) $3.6 d) $4.17

I have the answers to these already but I can’t figure out how to work them.

Explanation / Answer

18A} Calculation of right share price

  Market value of the shares already held by shareholder = 4*40 = 160

Price paid for to buy 1 right = 1*28 = 28

Total value of shares after right isse = 188

Average price of one share = 188/5 = 37.6

     Value of the right = Market value – Average price

= 40 - 37.6 =2.4

19A) Primary EPS = (Net income -Preferred dividends+interest *tax rate)/ Weighted- Average common shares outstanding

=(200000-20000+36000*40%)/50000

=3.88

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