The Warm 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 $100 to $90 ($100 is the rights-on-price; $90 is the ex-rights price,also known as the when-issued price).The company is seeking $18 million in additional funds with a per-share subscription price of $50.How many shares of stock are outstanding,before the offering? (Assume that the increment to the market value of the equity equals the gross proceeds of the offering.)
A)324,000
B)360,000
C)500,000
D)1,440,000
E)3,600,000

Question

Quizplus · Accepted Answer

P_Ex = $90 = ($50 + $100N)/(N + 1); N = 4Number of new shares = $18m/$50 = 360,000 sharesNumber of old shares = 4 × 360,000 = 1,440,000 shares