FARO Technologies, whose products include protable 3D measurement equipment, rec
ID: 2771269 • Letter: F
Question
FARO Technologies, whose products include protable 3D measurement equipment, recently had 17 million shares outstanding trading at $42 a share. Suppose the company announces its intention to raise $200 million by selling new shares.
b. How large a gain or loss in aggregate dollar terms do market signaling studies suggest existing FARO shareholders will experience on the announcement date?
c. What percentage of the value of FARO's existing equity prior to the announcement is this expected to gain or loss?
d. At what price should FARO expect its existing shares to sell immediately after the annoucement?
Explanation / Answer
In theory, as a result of the introduction of new shares at the deeply discounted price,the loss on your existing shareholding is offset exactly by the gain in share value on the new rights
Number of shares outstanding 17 Million Share price 42 Market capital 714 Million Market capital is no.of shares outstanding * price per share They want to raise additional 200 million from the market. So the total market capital would become 914 million(i.e.200 + 714 million) This would dilute the value of the company and so its share price is expected to reduce.In theory, as a result of the introduction of new shares at the deeply discounted price,the loss on your existing shareholding is offset exactly by the gain in share value on the new rights
It is not mentioned how many share they will issue , so as per the market value and new maney raised ratio So if we deduct 200 million from 714 million we get 514 million d. So the new stock price will be 514 million / 17 million = 30.23 As the total goodwill/or value will remain almost same i.e 714 million So if we divide 200 million by 30.23 we get 6.596 million So the company will issue around 6.596 million shares at a price around 30.23. So the total stocks floating in the market after the rights issue will be around 23.6 million c.The value of all the 17 million shares will decline from 42 to around 30 after the issue.But immediately after the announce the share price will increase as the equity share holders will get additional shares. So its demand will increase in a short term until the issue b.In aggregate dollar term there will be neither gain nor loss,but value of stock will get diluted.Related Questions
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