Question 1: The CC Corporation is making a privileged subscription stock issue to raise Rs 15 million. The terms of the issue are 1 for 9 at Rs 15, and the corporation’s current stock price is Rs 20.
Required:
Compute the given:
a) The market value of the corporation’s equity prior to the issue.
b) The percentage increase in market value due to the issue.
c) The expected price of one right.
d) The expected price of the stock ex-rights.
e) The number of rights which a stockholder who owned 975 shares would have to sell in order to take up her remaining rights and therefore maintains Rs19,500 investment in the company.
Question 2: The CC Corporation decides instead to issue the new stock via a general cash offer. The board believes the principal benefit of this is that the new shares can be sold at the higher price of Rs18 per share and thus that fewer new shares will have to be issued to increase the Rs 15 million the company requires.
Required:
Ignoring the underwriter’s spread, compute the given:
a) The number of new shares which the corporation will have to offer.
b) The expected price of the share after the issue.
c) The loss per share to existing shareholders.
d) The percentage reduction in the value of an existing stockholder’s investment in the company.
(v) The net present value of purchasing 100 shares through general cash offer.
Question 3: Make use of the figures you have computed above to write a brief explaining to the board why existing holders might lose instead of gain from the higher issue price. What alternative method would you propose to avoid wealth transfer?