Question

Big Box retailing has a market capitalization of $500 million and 20 million shares outstanding. In order to finance its growth, the management of Big Box plans to raise further capital through a rights issue. All shareholders will be issued ten rights to purchase a new share at a price of $1.00. What will the price of a share be after the SEO, if all shareholders exercise their rights

Answer 1

Price of stock after right issue = $22.81

Step-by-step explanation:

given data

market capitalization = $500 million

share outstanding = 20 million

new share at a price = $1.00

to find out

What will the price of a share be after the SEO

solution

we get first current stock price that is express as

current stock price =
`(market\ capitalization)/(share\ outstanding)` .....................1

current stock price =
`(500)/(20)`

current stock price = $25

and

every ten rights to purchase a new share at a price of $1.00

so number of right company can issue =
`(20)/(10)`

number of right company can issue = 2 million

so

Total Fund raise through right issue = 2 million × $1

Total Fund raise through right issue = $2 million

and

Total value of market capitalization after right issue = $500 + $2

Total value of market capitalization after right issue = $502 million

and

Total number of share outstanding after right issue = 20 million + 2 million

Total number of share outstanding after right issue = 22 million

so

Price of stock after right issue will be =
`(502)/(22)`

Price of stock after right issue = $22.81