The Metallica Heavy Metal Mining Mhmm Corporation Wants To Diversify Its Operations. Some Recent Financial Information For The Company Is Shown Here

Dilution The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations. Some recent financial information for the company is shown here:

Stock price

$ 96

Number of shares

12,000

Total assets

$6,000,000

Total liabilities

$2,400,000

Net income

$ 630,000

MHMM is considering an investment that has the same PE ratio as the firm. The cost of the investment is $1,100,000, and it will be financed with a new equity issue. The return on the investment will equal MHMM's current ROE. What will happen to the book value per share, the market value per share, and the EPS? What is the NPV of this investment? Does dilution take place? Dilution In the previous problem, what would the ROE on the investment have to be if we wanted the price after the offering to be $96 per share (assume the PE ratio still remains constant)? What is the NPV of this investment? Does any dilution take place?

Rights Gates Window Mfg. is considering a rights offer. The company has determined that the ex-rights price would be $45. The current price is $48 per share, and there are four million shares outstanding. The rights offer would raise a total of $60 million. What is the subscription price? Value of a Right Show that the value of a right can be written as:

where PRO, PS, and PX stand for the rights-on price, the subscription price, and the ex-rights price, respectively, and N is the number of rights needed to buy one new share at the subscription price.

Selling Rights Boan Corp. wants to raise $3.29 million via a rights offering. The company currently has 420,000 shares of common stock outstanding that sell for $30 per share. Its underwriter has set a subscription price of $25 per share and will charge Boan a 6 percent spread. If you currently own 6,000 shares of stock in the company and decide not to participate in the rights offering, how much money can you get by selling your rights?

Valuing a Right Mitsi Inventory Systems, Inc., has announced a rights offer. The company has announced that it will take four rights to buy a new share in the offering at a subscription price of $35. At the close of business the day before the ex-rights day, the company's stock sells for $70 per share. The next morning, you notice that the stock sells for $63 per share and the rights sell for $6 each. Are the stock and/or the rights correctly priced on the ex-rights day? Describe a transaction in which you could use these prices to create an immediate profit.

hat's On the Web?

16.1 Initial Public Offerings What is the most recent IPO? Go to www.bloomberg. com and follow the "IPO Center" link. What is the company? What exchange trades the stock? What was the IPO price? What is the current price? Verify the return listed on Bloomberg.

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

CHAPTER 16 Raising Capital

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