3. Western Airline has decided to raise S5M in new equity by means of a rights o

Question

3. Western Airline has decided to raise S5M in new equity by means of a rights offering. They have decided to issue 50,000 new shares. The stock currently sells for a rights-on price of $150 per share. If the ex-rights price is expected to be S133.33 per share, answer the following questions assuming all the rights are exercised unless otherwise stated. (a) What is the issue price? (b) How many shares are currently outstanding (before the rights issue)? (c) What percentage of the rights were actually exercised if the ex-rights price turns out to be $135.71? (d) Suppose the firm anticipates that 30% of the rights will not be exercised. What should the issue price be if the other issue terms stay the same and the firm wants to raise the same amount of money?

Explanation / Answer

(a) Issue price of Right shares = Amount raised/ No. of right shares 5000000/50000 100 (b) Let outstanding shares be S Ex right price X Total shares = (Cum right price x existing shares) + (Risht shares X issue price) 133.33 x (S + 50000) = (150 x S) + (100 X 50000) 133.33 S + 6666667 = 150 S + 5000000 S = 1666667/16.6667 S = 100000 ( c) Let Right shares excercised be R Ex right price X Total shares = (Cum right price x existing shares) + (Risht shares X issue price) 135.71 X (100000 +R) = (150 X 100000) + (R X 100) 13571000 + 135.71 R = 15000000 + 100 R R(135.71 - 100) = 1429000 R = 40016.8 Right excercised = 40016.8/50000 X 100               = 80.0% (d) If only 30% of rights will be excercised i.e 50000 X 30% = (A) 30000 Amount to be raised = (B) 5000000 Issue price = B/A 166.6667 Please provide feedback… Thanks in Advance :-)

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