FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Please Solve parts d) and e)

The Windsor Corporation has 120,000 shares outstanding with a current market price of $8.10 per
share. The company needs to raise an additional $36,000 to finance new expenditures, and has
decided on a rights issue. The issue will allow current stockholders to purchase one additional
share for 20 rights at a subscription price of $6
per
share.
a) How many new shares must be issued?
b) What will be the ex-rights stock price?
c) If the ex-rights price were set at $7.90, would you as a potential new stockholder choose to
buy shares ex-rights or buy shares at the old price and exercise your rights?
d) Suppose that the company was also considering structuring the rights issue to allow for an
additional share to be purchased for 10 rights at a subscription price of $3. Prove that a
stockholder with 100 shares would be indifferent between purchasing a new share for 10
rights at $3 or purchasing a new share for 20 rights at $6.
e) Why do you think the company chose a rights issue rather than a general cash offer to raise
new capital?
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Transcribed Image Text:The Windsor Corporation has 120,000 shares outstanding with a current market price of $8.10 per share. The company needs to raise an additional $36,000 to finance new expenditures, and has decided on a rights issue. The issue will allow current stockholders to purchase one additional share for 20 rights at a subscription price of $6 per share. a) How many new shares must be issued? b) What will be the ex-rights stock price? c) If the ex-rights price were set at $7.90, would you as a potential new stockholder choose to buy shares ex-rights or buy shares at the old price and exercise your rights? d) Suppose that the company was also considering structuring the rights issue to allow for an additional share to be purchased for 10 rights at a subscription price of $3. Prove that a stockholder with 100 shares would be indifferent between purchasing a new share for 10 rights at $3 or purchasing a new share for 20 rights at $6. e) Why do you think the company chose a rights issue rather than a general cash offer to raise new capital?
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