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Rights Offering

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Kristy Fashions, has 4.5 million shares of common stock outstanding. The current market price of common stock is 60 dollars per share rights on, The company net income this year is 18 mil. A right offering has been announced in which 450,000 news shares will be sold at 55 per share. The subscription price of 55 plus 10 right is needed to buy one of the new shares.

A. What are the earnings per share and price-earning ratio before the new shares are sold via the rights offering?

B. What would the price-earning) ratio be immediately after the rights offering? (assuming there is no change in the market value of the stock, expect for the change that occurs when the stock begins trading ex-rights.) Round all answers to two places to the right of the decimal point.

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Solution Preview

a) Earnings per Share = Net Income/Number of Shares Outstanding
EPS =$18 million earnings/4.5 million shares = $4 earnings per share

Price-Earnings Ratio (P/E) Ratio= Market Price/EPS
P/E = $60 market price/$4 ...

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The solution explains the impact of rights offering on various parameters.

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