16-9. After a banner year of rising profits and positive stock returns, the mana
ID: 2804968 • Letter: 1
Question
16-9. After a banner year of rising profits and positive stock returns, the managers of Raptor Pharmaceuticals Corporation (RPC) have decided to launch a seasoned equity offering to raise new equity capital. RPC currently has 10 million shares outstanding, and yesterday's closing market price was $75.00 per RPC share. The company plans to sell 1 million newly issued shares in its seasoned offering. The investment banking firm Robbum and Blindum (R&B;) has agreed to under- write the new stock issue for a 2.5% discount from the offering price, which RPC and R&B; have agreed should be $0.75 per share lower than RPC's closing price the day before the offering is sold. a. What is likely to happen to RPC's stock price when the plan for this seasoned offering is publicly announced? Assuming that RPC's stock price closes at $72.75 per share the day before the seasoned offering is launched, what net proceeds will RPC receive from this offering? Calculate the return earned by RPC's existing stockholders on their shares from the time before the seasoned offering was announced until it was actually sold for $72.75 per share. b. c. d. Calculate the total cost of the seasoned equity offering to RPC's existing stock- holders as a percentage of the offering proceeds.Explanation / Answer
Answer B) RPC's offering price = $72.75 - 0.75 = $75 per share
Net proceeds to be received by RPC = [$75 * (1- 2.5%)] * 2 million shares
=[$75 * (97.5%)] * 2 million shares
=[$73.125 * 2 million shares = 146.25 millions
Answer C) Return earned by RPC's existing stockholders = [$ 75.25 - $ 80]/ $80
= -0.05938
= 5.9%
AnswerD)
The total cost of the seasoned equity offering = [ $75.25 - $73.125] * 2 million
= $ 2.125 * 2 million
= $4.25 million
Offering Proceeds = $ 146.25 million[ as calculated in answer B above
Cost of existing shareholder(%) = The total cost of the seasoned equity offering proceeds
= $4.25 million / $146.25 million
= 0.02906
= 2.906%
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