ppose you own 60,000 shares of common stock in a firm with 3 million total shares outstanding. The firm announces a plan to sell an additional 1.2 million shares through a rights offering. The market value of the stock is $35 before the rights offering and the new shares are being offered to existing shareholders at a $5 discount. a. If you exercise your preemptive rights, how many of the new shares can you purchase? b. 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)) c-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)) c-2. If you exercise your preemptive right how many original shares and how many new shares do you have? d-1. 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)) d-2. 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 New shares
ppose you own 60,000 shares of common stock in a firm with 3 million total shares outstanding. The firm announces a plan to sell an additional 1.2 million shares through a rights offering. The market value of the stock is $35 before the rights offering and the new shares are being offered to existing shareholders at a $5 discount. a. If you exercise your preemptive rights, how many of the new shares can you purchase? b. 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)) c-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)) c-2. If you exercise your preemptive right how many original shares and how many new shares do you have? d-1. 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)) d-2. 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 New shares
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter18: Initial Public Offerings, Investment Banking, And Capital Formation
Section: Chapter Questions
Problem 9MC
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Concept explainers
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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Suppose you own 60,000 shares of common stock in a firm with 3 million total shares outstanding. The firm announces a plan to sell
an additional 1.2 million shares through a rights offering. The market value of the stock is $35 before the rights offering and the new
shares are being offered to existing shareholders at a $5 discount.
a. If you exercise your preemptive rights, how many of the new shares can you purchase?
b. 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))
c-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))
c-2. If you exercise your preemptive right how many original shares and how many new shares do you have?
d-1. 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))
d-2. 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.
New shares
b.
Market value
million
c-1.
Total investment
million
C-2.
Original shares
New shares
d-1.
Investment
million
d-2.
Sale of rights
million
Total investment
million
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