Reference no: EM132558104

Question - Instead of making an issue of stock to investors at large, companies sometimes give their existing shareholders the right of first refusal. Such issues are known as privileged subscription, or rights issues. Shareholders own one "right" for each share they held. Shareholders could sell, exercise, or throw away these rights. The following is an example.

The Bank of Notreal will offer a rights issue to its existing shareholders in order to increase its capital base by $58,750,000. The bank will allow shareholders to subscribe to new shares at a price which is $12.97 below the current market price of the common shares. Shareholders will receive one right for every share held. The bank's partial statements are shown below:

Partial Income Statement ($000)

Revenue $213,500

Interest 91,000

Earnings Before Tax 122,500

Taxes (@50%) 61,250

Earnings After Tax 61,250

Earnings per Share 3.50

Price Earnings Ratio 7.71

Required -

(a) How many common shares must be issued to finance the offering?

(b) How many rights are needed to subscribe to one new share?

(c) What is the ex-rights market value of the common shares?