The following question requires the calculation of the firm\'s market interactio
ID: 2728758 • Letter: T
Question
The following question requires the calculation of the firm's market interactions through a rights offering provided to its shareholders and their maintained proportions of shares.
Show all of your work.
The firm Davis & Martin and Zanders, Inc. (DMZ) has just announced that it will issue 10 million shares of common stock through a rights issue at a subscription price of $20. Before the announcement, DMZ shares were trading at $26, and there were 50 million shares outstanding.
a. How many rights will DMZ grant to its existing shareholders?
b. How many rights will an investor need to buy one of DMZ’s shares?
c. What will happen to DMZ’s share price when the rights issue is announced?
d. What should be the value of one right?
Explanation / Answer
a. DMZ grants right to its existing shareholders = 10 m / 50 m = 20%
b. Number of rights will an investor need to buy one of DMZ’s shares = 50m / 10m = 5 rights
c. As one share is provided for holding 5 shares, so 1/5th of Subscription price $20 should be the increase in the share price. So the share price of stock must rise by = 20 *1/5 = $4 per share. Thus Share price should be $26+4=$30 when the rights issue is announced.
d. The market value of one right = Market share price = $30 per right
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.