Log out Go to App
Go to App

Learning Materials

Features

Discover

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.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

How would you define efficient security markets?

Richmond Rent-A-Car is about to go public. The investment banking firm of Tinkers, Evers & Chance is attempting to price the issue. The car rental industry generally trades at a 20 percent discount below the P/E ratio on the Standard & Poor’s 500 Stock Index. Assume that index currently has a P/E ratio of 25. The firm can be compared to the car rental industry as follows:

Richmond

Car Rental Industry

Growth rate in earnings per share.....

15%

10%

Consistency of performance.............

Increased earnings

4 out of 5 years

Increased earnings

3 out of 5 years

Debt to total assets.....................

52%

39%

Turnover of product.........................

Slightly below average

Average

Quality of management..................

High

Average

Assume, in assessing the initial P/E ratio, the investment banker will first determine the appropriate industry P/E based on the Standard & Poor’s 500 Index. Then a half point will be added to the P/E ratio for each case in which Richmond Rent-A-Car is superior to the industry norm, and a half point will be deducted for an inferior comparison. On this basis, what should the initial P/E be for the firm?

The Pioneer Petroleum Corporation has a bond outstanding with an \(85 annual interest payment, a market price of \)800, and a maturity date in five years. Find the following:

a. The coupon rate.

b. The current rate.

c. The yield to maturity

Kevin’s Bacon Company Inc. has earnings of \(9 million with 2,100,000 shares outstanding before a public distribution. Seven hundred thousand shares will be included in the sale, of which 400,000 are new corporate shares, and 300,000 are shares currently owned by Ann Fry, the founder and CEO. The 300,000 shares that Ann is selling are referred to as a secondary offering, and all proceeds will go to her.

The net price from the offering will be \)16.50, and the corporate proceeds are expected to produce $1.8 million in corporate earnings.

a. What were the corporation’s earnings per share before the offering?

b. What are the corporation’s earnings per share expected to be after the offering?

Bonds of different risk classes will have a spread between their interest rates. Is this spread always the same? Why? (LO16-2)
See all solutions

Recommended explanations on Business Studies Textbooks

Intermediate Accounting

Read Explanation

Operational Management

Read Explanation

Business Case Studies

Read Explanation

Business Development

Read Explanation

Managerial Economics

Read Explanation

Strategic Analysis

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free