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Rights Offerings Again, Inc., is proposing a rights offering. Presently, there are 450,000 shares outstanding at \(\$ 90\) each. There will be 80,000 new shares offered at \(\$ 84\) each. 1\. What is the new market value of the company? 2\. How many rights are associated with one of the new shares? 3\. What is the ex-rights price? 4\. What is the value of a right? 5\. Why might a company have a rights offering rather than a general cash offer?

Rights Offering The Clifford Corporation has announced a rights offer to raise \(\$ 40\) million for a new journal, the Journal of Financial Excess. This journal will review potential articles after the author pays a nonrefundable reviewing fee of \(\$ 5,000\) per page. The stock currently sells for \(\$ 34\) per share, and there are 3.4 million shares outstanding. 1\. What is the maximum possible subscription price? What is the minimum? 2\. If the subscription price is set at \(\$ 30\) per share, how many shares must be sold? How many rights will it take to buy one share? 3\. What is the ex-rights price? What is the value of a right? 4\. Show how a shareholder with 1,000 shares before the offering and no desire (or money) to buy additional shares is not harmed by the rights offer.

Stone 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 \(\$ 75\) to \(\$ 70.25\) ( \(\$ 75\) is the "rights-on" price; \(\$ 70.25\) is the ex-rights price, also known as the when-issued price). The company is seeking \(\$ 15\) million in additional funds with a per-share subscription price equal to \(\$ 50\). 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.)

Calculating Flotation Costs The St. Anger Corporation needs to raise \(\$ 35\) million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. If the offer price is \(\$ 31\) per share and the company's underwriters charge an 8 percent spread, how many shares need to be sold?

Calculating Flotation Costs The Green Hills Co. has just gone public. Under a firm commitment agreement, Green Hills received \(\$ 22.10\) for each of the 8 million shares sold. The initial offering price was \(\$ 24\) per share, and the stock rose to \(\$ 29.50\) per share in the first few minutes of trading. Green Hills paid \(\$ 950,000\) in direct legal and other costs and \(\$ 250,000\) in indirect costs. What was the flotation cost as a percentage of funds raised?

Dilution Teardrop, Inc., wishes to expand its facilities. The company currently has 8 million shares outstanding and no debt. The stock sells for \(\$ 65\) per share, but the book value per share is \(\$ 20\). Net income for Teardrop is currently \(\$ 11.5\) million. The new facility will cost \(\$ 40\) million, and it will increase net income by \(\$ 600,000\). 1\. Assuming a constant price-earnings ratio, what will the effect be of issuing new equity to finance the investment? To answer, calculate the new book value per share, the new total earnings, the new EPS, the new stock price, and the new market-to-book ratio. What is going on here? 2\. What would the new net income for Teardrop have to be for the stock price to remain unchanged?

Rights A company's stock currently sells for \(\$ 63\) per share. Last week the firm issued rights to raise new equity. To purchase a new share, a stockholder must remit \(\$ 12\) and three rights. 1\. What is the ex-rights stock price? 2\. What is the price of one right? 3\. When will the price drop occur? Why will it occur then?

Rights Summit Corp.'s stock is currently selling at \(\$ 27\) per share. There are 1 million shares outstanding. The firm is planning to raise \(\$ 2\) million to finance a new project. What are the exrights stock price, the value of a right, and the appropriate subscription prices under the following scenarios? 1\. Two shares of outstanding stock are entitled to purchase one additional share of the new issue. 2\. Four shares of outstanding stock are entitled to purchase one additional share of the new issue. 3\. How does the stockholders' wealth change from part (a) to part (b)?

Selling Rights Wuttke Corp. wants to raise \(\$ 4,125,000\) via a rights offering. The company currently has 750,000 shares of common stock outstanding that sell for \(\$ 45\) per share. Its underwriter has set a subscription price of \(\$ 25\) per share and will charge Wuttke a 6 percent spread. If you currently own 6,000 shares of stock in the company and decide not to participate in the rights offering, how much money can you get by selling your rights?

Valuing a Right Mitsi Inventory Systems, Inc., has announced a rights offer. The company has announced that it will take four rights to buy a new share in the offering at a subscription price of \(\$ 40\). At the close of business the day before the ex-rights day, the company's stock sells for \(\$ 75\) per share. The next morning you notice that the stock sells for \(\$ 68\) per share and the rights sell for \(\$ 6\) each. Are the stock and/or the rights correctly priced on the ex-rights day? Describe a transaction in which you could use these prices to create an immediate profit.