P153 Rights LO4 Red Shoe Co has concluded that additional eq

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 obtained through a rights offering. It has correctly determined that as a result of the rights offering, the share price will fall from $150 to $128 ($150 is the rights-on price; $128 is the ex- rights price,also known as the when-issued price). The company is seeking $17 million in additional funds with a per-share subscription price equal to $75. 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 182,692 O 546,061 O 573,364 O 524,218 567,903

Solution

Using the equation calculate ex right

px =128= [N(150)+75]/(N+1)

N= 2.409

the number of new shares is the amount raised divided by the per share subscription price

so number of new shares = $17,000,000/75

= 226666

the number of old share is number of new shares times the number of right per share

number of old share = 2.409*226666

= 546058 or 546061

so the correct answer would be option 2 that is 546061