Pietersen Corporation must raise an additional $10,000,000 of equity capital through the sale of common stock in order to finance the construction of a new plant.The firm currently has an EPS of $5.40 and a P/E ratio of 10,with 1,200,000 shares outstanding.The firm will offer new shares to its current stockholders at $40 per share.Find (1)the number of new shares to be issued, (2)the ex-rights price of the stock (assuming that the new market value of the stock will simply be the proceeds of the new issue plus the current value of equity,divided by new shares outstanding),and (3)the value of one right. $\begin{array}{lll}
& \text { Sub Price } & \text { Ex-rights } \
\text { a. } & \$ 39.65 & \$ 42.50 \
\text { b. } & \$ 40.25 & \$ 43.50 \
\text { c. } & \$ 42.65 & \$ 47.50 \
\text { d. } & \$ 44.55 & \$ 49.00 \
\text { e. } & \$ 46.65 & \$ 50.00
\end{array}$

Question

Pietersen Corporation must raise an additional $10,000,000 of equity capital through the sale of common stock in order to finance the construction of a new plant.The firm currently has an EPS of $5.40 and a P/E ratio of 10,with 1,200,000 shares outstanding.The firm will offer new shares to its current stockholders at $40 per share.Find (1)the number of new shares to be issued, (2)the ex-rights price of the stock (assuming that the new market value of the stock will simply be the proceeds of the new issue plus the current value of equity,divided by new shares outstanding),and (3)the value of one right. $\begin{array}{lll} 
& \text { Sub Price } & \text { Ex-rights } \
\text { a. } & \$ 39.65 & \$ 42.50 \
\text { b. } & \$ 40.25 & \$ 43.50 \
\text { c. } & \$ 42.65 & \$ 47.50 \
\text { d. } & \$ 44.55 & \$ 49.00 \
\text { e. } & \$ 46.65 & \$ 50.00
\end{array}$

Quizplus · Accepted Answer

The Answer is D
(1) New shares

= \frac { ext { Funds to be raised } } { ext { Subscription price } } = \frac { \$ 10,000,000 } { \$ 40 } = 250,000

shares.
(2) Current market value of stock where

\mathrm{P} / \mathrm{E}=10

and

\mathrm{EPS}=\$ 5.40

:

\begin{array}{c}\frac{\mathrm{P}}{\$ 5.40}=10, ext { therefore } \\mathrm{P}=\$ 54.00\end{array}

Current market

=(\mathrm{P})

(Number of shares outstanding

)

value of stock

=\$ 54(1,200,000)=\$ 64,800,000 .

Current market Proceeds from Ex-rights price

=\frac{ ext { value of stock new issue }}{ ext { Old shares }+ ext { New shares }}

=\frac{\$ 64,800,000+\$ 10,000,000}{1,200,000+250,000}=\$ 51.59

(3)

\begin{array} { l } ext { Value of one right } = \frac { \begin{array} { l } ext { Market value of } - ext { Subscription } \ ext { stock, ex-rights }\end{array} } { \begin{array} { c } ext { Number of righs to } \ ext { purchase one share* }\end{array} } \= \frac { \$ 51.59 - \$ 40.00 } { 4.8 } = \$ 2.41 .\end{array}

Pietersen Corporation Must Raise an Additional $10,000,000 of Equity Capital