Suppose you own 40,000 shares of common stock in a firm with 2 million total sha
ID: 2782720 • Letter: S
Question
Suppose you own 40,000 shares of common stock in a firm with 2 million total shares outstanding. The firm announces a plan to sell an additional 0.6 million shares through a rights offering. The market value of the stock is $34 before the rights offering and the new shares are being offered to existing shareholders at a $4 discount.
If you exercise your preemptive rights, how many of the new shares can you purchase?
What is the market value of the stock after the rights offering? (Enter your answer in millions rounded to 1 decimal place. (e.g., 32.1))
What is your total investment in the firm after the rights offering? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. (e.g., 32.16))
If you exercise your preemptive right how many original shares and how many new shares do you have?
If you decide not to exercise your preemptive rights, what is your investment in the firm after the rights offering? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places. (e.g., 32.161))
If you sell your rights rather than use them, how much money will you receive from the rights sale and what is the total value of your proceeds from the sale of the rights offering plus your investment in the firm? (Enter your answer in millions rounded to 3 decimal places. (e.g., 32.161))
a.If you exercise your preemptive rights, how many of the new shares can you purchase?
Explanation / Answer
a)Current ownership=40000/(2*10^6)=2%
Out of 0.6mn offered w eare titled to receive 2%*0.6*10^6=12000 shares
b)market value of stock before rights offered=34*2*10^6=68*10^6mn
After rights offered the new shares issued at 30 per share and value of it =30*0.6*10^6=18mn
Total market value=68+18=86mn
C1)Total investment in the firm=((40000*34)+(12000*30))/10^6
=1.72mn
C2)12000 and 40000
D1)Per share value after rights offered=86/(2.6)=33.077
Value of investment=40000*33.077=0.132mn
D2)Sales of rights=12000*(34-33.077)=0.011mn
Total investment=0.132+0.011=0.143mn
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