P15-3 Rights [LO4] Red Shoe Co. has concluded that additional equity financing w

Question

P15-3 Rights [LO4] Red Shoe Co. has concluded that additional equity financing will be needed to expand operations and that the needed funds will be best obtalned through a rights offering. It has correctly determined that as a result of the rights offering, the share price will fall from $140 to $98 ($140 Is the rights-on price; $98 is the ex-rights price,also known as the when-issued price). The company is seeking $15 million In additional funds with a per-share subscription price equal to $70. 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) O 142,857 O 150,000 O 247755 O 137143 O 148,571

Explanation / Answer

Let the number of shares before right issue = n

Additional shares issued = 15 million/70 = 214285 shares

Market value before rights issue = $ 140*n

Incremental value = $ 15 million

Hence,

140n + 15million = (n+214285)*98

thus 42n = 5999930

n = 142857

Option 1 is the correct answer

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