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 $150 to $120 ($150 is the rights-on price; $120 is the ex-rights price,also known as the when-issued price). The company is seeking $13 million in additional funds with a per-share subscription price equal to $75. 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.)

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 $150 to $120 ($150 is the rights-on price; $120 is the ex- rights price,also known as the when-issued price). The company is seeking $13 million in additional funds with a per-share subscription price equal to $75. 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.) O 249,600 O 260,000 O 273,000 O 270,400 O 156,867

Explanation / Answer

Let's solve this step by step

Step 1) Find ex rights No. of shares

=(Ex right price- subsciption price) / (Right on price - ex right price)

=120-75 / 150-120

=45/30

=1.5

Step 2) Find No of new shares

=Total issue size/ Subsription price

=13,000,000/75

=173,333 shares

Step 3) No. old shares = Step 1* spep 2

No of old shares = 1.5*173,333

=260,000 shares

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