Answers to Chapter Review and Self Test Problems

16.1 The firm needs to net $15 million after paying the 7 percent flotation costs. So the amount raised is given by:

Amount raised X (1 — .07) = $15 million Amount raised = $15 million/.93 = $16.129 million

The total flotation cost is thus $1.129 million.

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VI. Cost of Capital and Long-Term Financial Policy

16. Raising Capital

© The McGraw-Hill Companies, 2002

PART SIX Cost of Capital and Long-Term Financial Policy

16.2 To raise $20 million at $25 per share, $20 million/25 = 800,000 shares will have to be sold. Before the offering, the firm is worth 3 million X $40 = $120 million. The issue will raise $20 million and there will be 3.8 million shares outstanding. The value of an ex-rights share will therefore be $140 million/3.8 million = $36.84. The value of a right is thus $40 - 36.84 = $3.16.

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