Problems 1-15
Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green
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Chapter 15
Question 1 Input Area:
$ $
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:
$ $ $
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
Chapter 15
Question 3 Input Area:
$ $ $ $
81 74.80 20,000,000 40
Output Area:
Chapter 15
Question 4 Input Area:
$ $ $
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:
$ $
60,000,000 21 9%
Output Area:
65,934,066 3,139,717
Chapter 15
Question 6 Input Area:
$ $ $
60,000,000 21 9% 900,000
Output Area:
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
$ $ $ $ $
Output Area:
Net amount raised Total direct costs Total indirect costs Total costs Flotation cost
$ $ $ $
Chapter 15
Question 8 Input Area:
Shares outstanding Share price Company equity New shares issued New price: X Y Z
$ $
$ $ $
Output Area:
Number of rights needed P(X) Share price drops by P(Y) Share price drops by P(Z) Share price drops by
$ $ $ $ $ $
Chapter 15
Question 9 Input Area:
Shares outstanding Share price Book value Net income New facility cost Increase to net income
$ $ $ $ $
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
$ $ $ $ $
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
$ $ $ $ $ $
Output Area:
$ $
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:
$ $ $
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
$ $ $
Output Area:
Net proceeds to company New shares offered Number of rights needed P(X) Value of a right Proceeds from selling rights
$ $ $
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:
$ $ 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.