Consider the situation faced by the CFO of a company with a market capitalizatio
ID: 2639593 • Letter: C
Question
Consider the situation faced by the CFO of a company with a market capitalization of $1B. The firm has 100 million shares outstanding, so the shares are trading at $10 per share. The CFO needs to raise $200M and has announced a rights issue. Each existing shareholder is sent one right for every share he or she owns. The CFO has not decided how many rights he will require to purchase a share of new stock. He is considering two options.
Option A: He will require 4 rights to purchase one share at a price of $8 per share; and
Option B: He will require 5 rights to purchase two new shares at a price of $5 per share.
How much money will Option A raise?
$100,000,000
$200,000,000
$300,000,000
$400,000,000
$100,000,000
$200,000,000
$300,000,000
$400,000,000
Explanation / Answer
Option :A
If he require 4 rights to purchase one share at a price of $8 per share
Outstanding shares=100
Therefore if for every 4 rights one share is purchased=100 million /4
=25 millionshares
Money raised by Option A =25 million shares*$8
=$200 m