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Chapter 5: 13BP-c (page 568)

13. Computer Graphics has announced a rights offering for its shareholders. Carol Stevens owns 1,400 shares of Computer Graphics stock. Four rights plus \(54 cash are needed to buy one of the new shares. The stock is currently selling for \)66 rights-on.

c. Carol doesn’t know if she wants to exercise her rights or sell them. Would either alternative have a more positive effect on her wealth?

Short Answer

Expert verified

Answer

The option to exercise the rights or sell the rights will not have any impact on the stockholder’s wealth.

Step by step solution

01

Meaning of stockholder’s wealth

The value held by the stockholders in a company is called stockholder’s wealth.The stockholder’s wealth is calculated based on the current value of shares and the shares outstanding.

02

Impact of either option on stockholder’s wealth

If carol exercises the rights option or sells them, it will not have any impact on the stockholder’s wealth.The ability of the company to generate adequate cash flows and return on investment impacts the stockholder’s wealth.

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Most popular questions from this chapter

Louisiana Timber Company currently has 5 million shares of stock outstanding and will report earnings of \(9 million in the current year. The company is considering the issuance of 1 million additional shares that will net \)40 per share to the corporation.

a. What is the immediate dilution potential for this new stock issue?

b. Assume the Louisiana Timber Company can earn 11 percent on the proceeds of the stock issue in time to include it in the current year’s results. Should the new issue be undertaken based on earnings per share?

Tyson Iron Works is about to go public. It currently has after-tax earnings of \(4,400,000, and 4,200,000 shares are owned by the present stockholders. The new public issue will represent 500,000 new shares. The new shares will be priced to the public at \)25 per share with a 3 percent spread on the offering price. There will also be $280,000 in out-of-pocket costs to the corporation.

b. Compute the earnings per share immediately before the stock issue.

Question: The Bailey Corporation, a manufacturer of medical supplies and equipment, is planning to sell its shares to the general public for the first time. The firm’s investment banker, Robert Merrill and Company, is working with Bailey Corporation in determining a number of items. Information on the Bailey Corporation follows:

Bailey corporation

Income statement

For the year 20X1

Sales (all on credit)

\(42,680,000

Cost of goods sold

\)32,240,000

Gross profit

\(10,440,000

Selling and administrative expenses

\)4,558,000

Operating profit

\(5,882,000

Interest expense

\)600,000

Net income before taxes

\(5,282,000

Taxes

\)2,120,000

Net income

\(3,162,000

Bailey corporation

Balance sheet

As of December 31, 20X1

Assets

Current assets:

Cash

\)250,000

Marketable securities

\(130,000

Accounts receivables

\)6,000,000

Inventory

\(8,300,000

Total current assets

\)14,680,000

Net plant and equipment

\(13,970,000

Total assets

\)28,650,000

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

\(3,800,000

Notes payable

\)3,550,000

Total current liabilities

\(7,350,000

Long-term liabilities

\)5,620,000

Total liabilities

\(12,970,000

Stockholder’s equity:

Common stock (1,800,000 shares at \)1 par)

\(1,800,000

Capital in excess of par

\)6,300,000

Retained earnings

\(7,580,000

Total stockholder’s equity

\)15,680,000

Total liabilities and stockholder’s equity

\(28,650,000

e. Assuming an underwriting spread of 5 percent and out-of-pocket costs of \)300,000, what will net proceeds to the corporation be?

Tiger Golf Supplies has $25 million in earnings with 7 million shares outstanding. Its investment banker thinks the stock should trade at a P/E ratio of 31. Assume there is an underwriting spread of 7.8 percent. What should the price to the public be?

Question: The management of Mitchell Labs decided to go private in 2002 by buying in all 2.80 million of its outstanding shares at \(24.80 per share. By 2006, management had restructured the company by selling off the petroleum research division for \)10.75 million, the fiber technology division for \(8.45 million, and the synthetic products division for \)20 million. Because these divisions had been only marginally profitable, Mitchell Labs is a stronger company after the restructuring. Mitchell is now able to concentrate exclusively on contract research and will generate earnings per share of $1.10 this year. Investment bankers have contacted the firm and indicated that if it re-entered the public market, the 2.80 million shares it purchased to go private could now be reissued to the public at a P/E ratio of 15 times earnings per share.

c. What is the percentage return to the management of Mitchell Labs from the restructuring? Use answers from parts a and b to determine this value
See all solutions

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