Chapter 15

Problems 1-15
Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green
NOTE: Some functions used in these spreadsheets may require that the "Analysis ToolPak" or "Solver Add-in" be installed in Excel. To install these, click on "Tools|Add-Ins" and select "Analysis ToolPak" and "Solver Add-In."

sis ToolPak"

Chapter 15
Question 1 Input Area:

Shares outstanding Price New shares New price

$ $

500,000 81.00 60,000 70.00

Output Area:

a. b. c. d. e.

New market value $ 44,700,000 Number of rights needed 8.33 P(x) $ 79.82 Value of a right $ 1.18 A rights offering usually costs less, it protects the proportionate interests of existing shareholders, and protects against underpricing.

Chapter 15
Question 2 Input Area:

Amount raised Stock price Shares outstanding Subscription price Shareholder

$ $ $

40,000,000 53 4,100,000 48 1,000

Output Area:

a. Maximum subscription price = current share price Minimum is anything > 0 b. Number of new shares Number of rights needed c. P(X) Value of a right d. Before offer: After offer:

$

53

833,333 4.92 $ $ $ $ 52.16 0.84 53,000 53,000

Chapter 15
Question 3 Input Area:

Ex-rights price Rights-on price Funds needed Price

$ $ $ $

81 74.80 20,000,000 40

Output Area:

N Number of new shares Number of old shares

5.613 500,000 2,806,452

Chapter 15
Question 4 Input Area:

Undervalued IPO Overvalued IPO Price # of shares 1/2 # of shares

$ $ $

7 5 40 1,000 500

Output Area:

If you receive 1000 shares each, the profit is: $ 2,000 Expected profit $ (1,500) This is an example of the winner's curse.

Chapter 15
Question 5 Input Area:

Funds needed Offer price Spread

$ $

60,000,000 21 9%

Output Area:

Proceeds from sale Number of shares offered

$

65,934,066 3,139,717

Chapter 15
Question 6 Input Area:

Funds needed Offer price Spread Administrative expense

$ $ $

60,000,000 21 9% 900,000

Output Area:

Proceeds from sale Number of shares offered

$

66,923,077 3,186,813

Chapter 15
Question 7 Input Area:

Company price per share Shares sold Initial offer price New price Direct costs Indirect costs

$ $ $ $ $

18.20 10,000,000 20.00 25.60 900,000 320,000

Output Area:

Net amount raised Total direct costs Total indirect costs Total costs Flotation cost

$ $ $ $

180,780,000 18,900,000 56,320,000 75,220,000 41.61%

Chapter 15
Question 8 Input Area:

Shares outstanding Share price Company equity New shares issued New price: X Y Z

$ $

120,000 94 11,280,000 25,000 94 90 85

$ $ $

Output Area:

Number of rights needed P(X) Share price drops by P(Y) Share price drops by P(Z) Share price drops by

$ $ $ $ $ $

4.80 94.00 93.31 0.69 92.45 1.55

Chapter 15
Question 9 Input Area:

Shares outstanding Share price Book value Net income New facility cost Increase to net income

$ $ $ $ $

8,000,000 50 18 17,000,000 35,000,000 1,100,000

Output Area:

Number of shares after offering 8,700,000 New book value per share $ 20.57 EPS0 $ 2.13 P/E0 23.53 Earinings1 $ 18,100,000 EPS1 $ 2.08 Price1 $ 48.95 Old market to book 2.7778 New market to book 2.3792 Accounting dilution has occurred because new shares were issued when the market to book ratio was less than one; market value dilution has occurred because the firm financed a negative NPV project: NPV $ (9,117,647) For the price to remain unchanged when the P/E ratio is constant, EPS must remain constant. Net income $ 18,487,500

Chapter 15
Question 10 Input Area:

Stock price Number of shares Total assets Total liabilities Net income Investment cost

$ $ $ $ $

84 30,000 8,000,000 3,400,000 900,000 850,000

Output Area:

ROE NI EPS0 Number of new shares EPS1 P/E0 P1 P/E1 BVPS0 BVPS1 Mkt to book 0 Mkt to book 1

$ $ $ $ $ $

0.1957 1,066,304 30.00 10,119 26.58 2.800 74.42 2.800 153.33 135.85 0.5478 0.5478

NPV $ (384,348) Accounting dilution takes place here because the market-to-book ratio is less than one. Market value dilution has occurred since the firm is investing in a negative NPV project.

Chapter 15
Question 11 Input Area:

Stock price Number of shares Total assets Total liabilities Net Income Cost P/E0

$ $ $ $ $ $

84 30,000 8,000,000 3,400,000 900,000 850,000 2.800

Output Area:

EPS1 Net income1 ROE

$ $

30.00 303,571 35.71%

If the share price after the offering is the same, then the project NPV is $0.00 Accounting dilution still takes place, as the BVPS still falls from $ 153.33 to $ 135.85 , but no market value dilution taked place because the firm is investing in a zero NPV project.

Chapter 15
Question 12 Input Area:

Ex-rights price Stock price Number of shares Rights offer total

$ $ $

71 76 19,000,000 60,000,000

Output Area:

Subscription price

$

27.48

Chapter 15
Question 13 Output Area:

Px = [NPRO+PS]/(N+1) Value of a right = PRO - PX = PRO - {[NPRO+PS]/N+1)} = [(N+1)PRO - NPRO - PS]/(N+1) =[PRO - PS/(N+1)

Chapter 15
Question 14 Input Area:

Rights offer total Number of shares Stock price Subscription price Spread charge Shares owned

$ $ $

5,600,000 650,000 50 23 6% 5,000

Output Area:

Net proceeds to company New shares offered Number of rights needed P(X) Value of a right Proceeds from selling rights

$

$ $ $

21.62 259,019 2.51 42.31 7.69 38,467.41

Chapter 15
Question 15 Input Area:

Rights offer per share Subscription price Stock price Ex-rights stock price Rights price

$ $ $ $

4 35 60 53 3

Output Area:

P(X) Value of a right The rights are

$ $ underpriced

55.00 7

You can create an immediate profit on the ex-rights day if the stock is selling for $ 53.00 and the rights are selling for $ 3 by executing the following transactions. Buy 4 in the market for $ 12.00 Use these rights to purchase a new share at the subscription price of $ 35 Immediately sell this share in the market for $ 53.00 creating an instant $ 6.00 profit.

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