P15-3 Rights [LO4] Red Shoe Co. has concluded that additional equity financing w

Question

P15-3 Rights [LO4] 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 $90 to $63 ($90 is the rights-on price: $63 Is the ex-rights price,also known as the when-issued price). The company is seeking $12 million in additional funds with a per-share subscription price equal to $45. 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 170667 O 308,317 O 186.667 O 184,889

Explanation / Answer

Given that - ex-rights price 63 Current price 90 Subscription price 45 We know ex right price = 63 63 = (N*90+45)/(N+1) 63N+63= 90N+45 90N-63N= =63-45 N= 18/27       0.667 new shares = required amount to raise/ per-share subscription price New share = =12,000,000/45 266666.7 Number of old outstanding share = 0.667*new share        177,778 Hence, Correct answer is 177,778

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