Keira Mfg. is considering a rights offer. The company has determined that the ex

Question

Keira Mfg. is considering a rights offer. The company has determined that the ex-rights price would be $76. The current price is $90 per share, and there are 36 million shares outstanding. The rights offer would raise a total of $60 million. What is the subscription price?

The number of new shares is the amount raised divided by the subscription price, so: Number of new shares = $60,000,000/$PS And the ex-rights number of shares (N) is equal to: N = Old shares outstanding/New shares outstanding N = 36,000,000/ ($60,000,000/$PS) N = 0.60PS

We know the equation for the ex-rights stock price is: PX = [NPRO + PS]/ (N + 1) We can substitute in the numbers we are given, and then substitute the two previous results. Doing so, and solving for the subscription price, we get: PX = $76 = [N ($90) + $PS]/(N + 1)

$76 = [$90(0.60PS) + PS]/ (0.60PS + 1)

$76 = $54PS/ (1 + .60PS)

PS = $9.04 which is wrong

Explanation / Answer

$76 = [$90(0.60PS) + PS]/ (0.60PS + 1)

$76 = ($54PS + PS) / (0.60PS + 1)

$76(0.60ps + 1) = $55PS

$45.6 PS + $76 = $55PS

$76 = 55 PS - 45.6 PS

$76 = 9.4 ps

therefor, $PS = 76 / 9.4 = $8.085

THankyou

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