After a banner year of rising profits and positive stock returns, the managers o
ID: 2731919 • Letter: A
Question
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 20 million shares outstanding, and yesterday's closing market price was $80.00 per RPC share. The company plans to sell 2 million newly issued shares in its seasoned offering. The investment banking firm Robbum and Blindum (R&B) has agreed to underwrite the new stock issue for a 2.5% discount from the offering price, which RPC and R&B have agreed should be $1.60 per share lower than RPC's closing price the day before the offering is sold. a) Assuming that RPC's stock price closes at $77.60 per share the day before the seasoned offering is launched, what net proceeds will RPC receive from this offering? $ b) 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 $77.60 per share. Round your answer to two decimal places. c) Calculate the total cost of the seasoned equity offering to RPC's existing stockholders as a percentage of the offering proceeds. Round your answer to two decimal places. Please show how you arrived at the answer.Explanation / Answer
Answer
Answer a)
RPC’s Offering price = $ 77.60 - $ 1.60
= $ 76 per share
Net proceeds to be received by RPC = [$ 76 * (1 – 2.5%)] * 2 million shares
= [$ 76 * (97.5%)] * 2 million shares
= 74.10 * 2 million shares
= $ 148.2 million
Answer b)
Return earned by RPC's existing stockholders = ( $ 77.60 - $ 80) / $ 80
= -2.4/ 80
= -0.03
= - 3%
Answer c)
The total cost of the seasoned equity offering = [$77.60 - $ 74.10] * 2 million shares
= $ 3.5 * 2 million
= $ 7 million
Offering Proceeds = $ 148.2 million [ as calculated in answer (a) above ]
Cost to existing shareholder (%) = The total cost of the seasoned equity offering / Offering Proceeds
= $ 7 million / $ 148.2 million
= 0.0472
= 4.72 %
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.