Full Name: Nguyễn ThỊ Yến Nhi

Student ID: FAFBIU22137

Corporate Finance
Questions and Practice problems_Chapter 20

Chapter 20:
Concept questions (page 650 textbook): 4, 8, 10, 11, 12, 13, 15
Questions and Problems (page 652 textbook): 1, 2, 3, 8

Concept questions
4. Why is underpricing not a great concern with bond offerings? Use the following
information to answer the next three questions. Zipcar, the car sharing company, went
public in April 2011. Assisted by the investment bank Goldman, Sachs & Co., Zipcar sold
9.68 million shares at $18 each, thereby raising a total of $174.24 million. By the end of
the first day of trading, the stock had zipped to $28 per share, down from a high of
$31.50. Based on the end-of-day numbers, Zipcar shares were apparently underpriced
by about $10 each, meaning that the company missed out on an additional $96.8 million

8. Ren-Stimpy International is planning to raise fresh equity capital by selling a large new
issue of common stock. Ren-Stimpy is currently a publicly traded corporation, and it is
trying to choose between an underwritten cash offer and a rights offering (not
underwritten) to current shareholders. Ren-Stimpy management is interested in
minimizing the selling costs and has asked you for advice on the choice of issue
methods. What is your recommendation and why?

10. The following material represents the cover page and summary of the prospectus for
the initial public offering of the Pest Investigation Control Corporation (PICC), which is
going public tomorrow with a firm commitment initial public offering managed by the
investment banking firm of Erlanger and Ritter. Answer the following questions:
a. Assume that you know nothing about PICC other than the information contained in
the prospectus. Based on your knowledge of finance, what is your prediction for the
price of PICC tomorrow? Provide a short explanation of why you think this will occur.
b. Assume that you have several thousand dollars to invest. When you get home from
class tonight, you find that your stockbroker, whom you have not talked to for
weeks, has called. She has left a message that PICC is going public tomorrow and
that she can get you several hundred shares at the offering price if you call her back
first thing in the morning. Discuss the merits of this opportunity.

11. What are the comparative advantages of a competitive offer and a negotiated offer,
respectively?
 12. What are the possible reasons why the stock price typically drops on the announcement
of a seasoned new equity issue?

13. Megabucks Industries is planning to raise fresh equity capital by selling a large new issue
of common stock. Megabucks, a publicly traded corporation, is trying to choose
between an underwritten cash offer and a rights offering (not underwritten) to current
shareholders. Megabucks’ management is interested in maximizing the wealth of
current shareholders and has asked you for advice on the choice of issue methods.
What is your recommendation? Why?

15. Every IPO is unique, but what are the basic empirical regularities in IPOs?

Questions and Problems

1. Again, Inc., is proposing a rights offering. Presently, there are 550,000 shares
outstanding at $87 each. There will be 85,000 new shares offered at $81 each.
a. What is the new market value of the company?
b. How many rights are associated with one of the new shares?
c. What is the ex-rights price?
d. What is the value of a right?
e. Why might a company have a rights offering rather than a general cash offer?

Answer: Given:
 Current shares outstanding = 550,000
 Current share price = $87
 New shares to be issued = 85,000
 Subscription price for new shares = $81
(a)
 Current Market Value=550,000 ×87=47,850 , 00 0
 Funds Raised=85,000× 81=6,885 , 00 0
 New Market Value=47,850,000+ 6,885,000=54,735,000
(b)
Each existing share gets 1 right. A certain number of rights are needed to buy 1 new share.
Existing shares ❑
 Rights per new share= =
New shares ❑

=
550,000
85,000
≈
6.47
rights/share
Rights per new share=
New shares
Existing shares
=
85,000
550,000

≈
6.47 rights/share

This means you need approximately 6.47 rights to buy 1 new share.

(c) What is the ex-rights price?

The ex-rights price is the weighted average price after the new shares are issued:

Ex-rights price
=
(
550,000
×
87
)
+
(
85,000
×
81
)
550,000
+
85,000
Ex-rights price=
550,000+85,000
(550,000×87)+(85,000×81)

=
47,850,000
+
6,885,000
635,000
=
54,735,000
635,000
=
86.22
=
635,000
47,850,000+6,885,000

=
635,000
54,735,000

=
86.22

(d) What is the value of a right?

The value of a right is the difference between the old price and the ex-rights price, adjusted for
the number of rights needed per new share:

Value of a right
=
87
−
86.22
6.47
=
0.78
6.47
≈
0.12
Value of a right=
6.47
87−86.22

=
6.47
0.78

≈
0.12

2. The Clifford Corporation has announced a rights offer to raise $28 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 $27 per share, and there are 2.9 million shares outstanding.
 a. What is the maximum possible subscription price? What is the minimum?
b. If the subscription price is set at $25 per share, how many shares must be sold? How
many rights will it take to buy one share?
c. What is the ex-rights price? What is the value of a right?
d. 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

3. 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 $65 to $63.18 ($65 is the “rights-on” price; $63.18 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.)

8. Raggio, Inc., has 135,000 shares of stock outstanding. Each share is worth $75, so the
company’s market value of equity is $10,125,000. Suppose the firm issues 30,000 new
shares at the following prices: $75, $70, and $65. What will the effect be of each of
these alternative offering prices on the existing price per share?