Pietersen Corporation Must Raise an Additional $10,000,000 of Equity Capital

Question

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The Answer is D
(1) New shares

= \frac { ext { Funds to be raised } } { ext { Subscription price } } = \frac { \$ 10,000,000 } { \$ 40 } = 250,000

shares.
(2) Current market value of stock where

\mathrm{P} / \mathrm{E}=10

and

\mathrm{EPS}=\$ 5.40

:

\begin{array}{c}\frac{\mathrm{P}}{\$ 5.40}=10, ext { therefore } \\mathrm{P}=\$ 54.00\end{array}

Current market

=(\mathrm{P})

(Number of shares outstanding

)

value of stock

=\$ 54(1,200,000)=\$ 64,800,000 .

Current market Proceeds from Ex-rights price

=\frac{ ext { value of stock new issue }}{ ext { Old shares }+ ext { New shares }}

=\frac{\$ 64,800,000+\$ 10,000,000}{1,200,000+250,000}=\$ 51.59

(3)

\begin{array} { l } ext { Value of one right } = \frac { \begin{array} { l } ext { Market value of } - ext { Subscription } \ ext { stock, ex-rights }\end{array} } { \begin{array} { c } ext { Number of righs to } \ ext { purchase one share* }\end{array} } \= \frac { \$ 51.59 - \$ 40.00 } { 4.8 } = \$ 2.41 .\end{array}

Short Answer