CyTykes Toys has 1000 shares that are the sole source of financing. CyTykes is c

Question

CyTykes Toys has 1000 shares that are the sole source of financing. CyTykes is considering investing in a remote control helicopter project that would cost $50,000 and has an NPV of $25,000

•If the current share price is $150, what is the new share price and market value of the firm if the project is financed with a new SEO for 500 shares at par value $100?

•What happens to current shareholders?   

•What if instead of an SEO, CyTykes offers rights to existing shareholders? CyTykes allows each shareholder to buy 1 new share for every two shares they own at a price of $100. If all exercise their rights, what is the eventual price and value of the firm?

Explanation / Answer

Before helicopter

Market value = 1000*150 = 150000

Additional equity = 500*100 = 50000

NPV = 25000

Total market value = 150000 + 50000 + 25000 = 225000

new shareprice = 225000 /(1000 + 500) = 150

New shareholders benefit, old share holders wont get any benefit.

c)

Now there will be 500 rights (1000/2)

All rights are exercised

Value = 150000 + 500*100 = 200000

share price = 200000 / 1500 = 133.33

After helicopter

Value = 200000 + 25000 = 225000

Share priece = 225000 / 1500 = 150

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