CH 15
CH 15
CH 15
1) You decide to sell an additional 1,500 shares of stock in your firm through a Dutch
auction. The bids that you receive include:
How much will you receive in total from selling the additional 1,500 shares? Ignore all
transaction and flotation costs.
A. $57,000
B. $58,500
C. $60,750
D. $60,782
Since you need to issue 1,500 shares, you need to find that highest bid that would result
in 1500 shares being sold. All 1500 shares will not be sold until the price hits $39.
Therefore, $39 will be the offer price in the IPO. The total amount received from selling
the shares = 1500 x $39 = $58,500
2) Two IPOs will commence trading next week. Andrew places an order to buy 500
shares of IPO A. Jessica places an order to purchase 300 shares of IPO A and 200 shares
of IPO B. Both IPOs are priced at $30 a share. Andrew is allocated 150 shares of IPO A.
Jessica is allocated 100 shares of IPO A and 200 shares of IPO B. At the end of the first
day of trading, IPO A is selling for $32 a share and IPO B is selling for $28 a share. What
is the difference in the total profits or losses that Andrew and Jessica have as of the end
of the first day of trading?
A. $100
B. $200
C. $300
D. $400
E. $500
Jessica's profit = [100 ($32 - $30)] + [200 ($28 - $30)] = $200 - $400 = -$200;
4) Mister Noodle wants to raise $24 million through a rights offering. The current market
price of the stock is $18, the subscription price is $16, and there are 4 million shares of
stock outstanding. How many shares need to be sold in the rights offering?
A. 1.33 million
B. 1.50 million
C. 2.67 million
D. 3 million
E. 6 million
5) Tell-Al, Inc. has 8 million shares of common stock outstanding at a market price of
$22. The company has just announced a rights offering for $27 million at a subscription
price of $18. What is the ex-rights price?
A. $20.00
B. $20.88
C. $21.02
D. $21.37
E. $21.76
M 0 S $22 $18
Value of a right (R) = R $0.63
N 1 5.33 1
Ex –Rights Price = M0-R = $22-$0.63 = $21.37
# of existing shares 1,600,000
N 2
# of new shares # of new shares
Therefore, # of new shares = 1,600,000/2 = 800,000
Value of a right:
$12 $10
R $.67
2 1
Ex Rights Price (Me) = $12 -$0 .67 = $11.33
7) The Green Hornet wants to raise $25 million in a rights offering. The stock price is
$48 a share, the subscription price is $40 a share, and there are 4 million shares
outstanding. What is the value of one right?
A. $0.97
B. $1.03
C. $1.08
D. $1.11
E. $1.33
M 0 S $48 $40
Value of a right (R) = R $1.08
N 1 6 .4 1
8)
Winter_2017 Prof. Willis Page 3
a) N =?
$5,000,000
Number of new shares to be issued = 100,000
$50
500,000
Number of rights required to buy one new share N 100,000 5
M0 S $68 $50
R = $3 per right
N 1 5 1
b) The share price will drop by the value of the right (to $68 - $3 = $65) on the ex-rights
date, which is 2 business days before the holder of record date.
M0 S $84 $52
9) a) R = $4
N 1 7 1
700 * $4 + 2,800
Total market value $58,800 (no change)
The shareholder is neither better, nor worse off, as long as he or she either exercises
or sells the rights. However, if he or she lets them expire, a loss of $2,800 is suffered.
$200,000,000
10) (a) Have to issue 10,000,000 new shares
$20
ABC will be issuing 10,000,000 rights since they have 10,000,000 shares outstanding.
Therefore, 1 right will be required per new share.
M0 S
(b) R
N 1
25 20
$2.50
11
(c)
(i) Rights on Price (M0) = $25
(ii) Ex Rights Price (Me): Before holder of record date= $25 - $2.50 = $22.50
(iii) Ex Rights Price (Me): After holder of record datesdfg = $22.50
$50,000
10,000
$5.00
d.
Announcement Ex-rights Holder of Expiry After Expiry
Date Date Record Date Date Date
Share $10.00 $9.50 $9.50 $9.50 $9.50
e.
i)
Wealth
900 old shares @ 10.00 = 9,000.00
Ownership 900 = 1.0000%
90,000
ii)
Wealth
900 old shares @ 9.50 = 8,550.00
100 new shares @ 9.50 = 950.00
Gross 9,500.00
Less: additional investment
100 new shares @ 5.00 = 500.00
Net wealth 9,000.00
12)
# of existing shares
b) N # of new shares
N = 2,000,000/500,000 = 4
M 0 S $6 $4 $2
R $0.40
N 1 4 1 5
Ownership = 5% (given)
Number Amount
Shares 100,000 @ 5.60 = 560,000.00
Rights 100,000 @ 0.40 = 40,000.00
Total Wealth 600,000.00
iv) On the expiry date, Rodney decides to sell the rights rather than
exercise the rights. What is his net wealth and ownership position?
Wealth:
Number Amount
Shares 100,000 @ 5.60 = 560,000.00
Sell Rights for Cash 100,000 @ 0.40 = 40,000.00
Total Wealth 600,000.00 (no change)