Red Shoe Co. has concluded that additional equity financing will be needed to ex

Question

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 $68 to $64.80 ($68 is the rights-on price; $64.80 is the ex-rights price, also known as the when-issued price). The company is seeking $24 million in additional funds with a per-share subscription price equal to $40. 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.) (Do not round intermediate calculations and round your final answer to nearest whole number, e.g., 32.)

Number of old shares?

Explanation / Answer

Given the issue price of the Right = $40 Given additional Capital = $24million No of additional shares issued = 600000 Let X be old no of shares So as given (68X+24000000)/(X+600000) = 64.80 68X+24000000= 64.8(X+600000) X= ((64.8*600000)-24000000)/3.2 X= 4650000 Old no of shares = 4650000

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