Question: Assume that SmallTech has net income of $ 1 million and that the earnings will increase in proportion with the additional capital raised.
a. Estimate the earning per share that SmallTech will have after the rights issue described in the last problem.
b. Assume that SmallTech could have raised the capital by issuing 333,333 shares at the prevailing market price of $ 15 per share (thus raising the same amount of equity as was raised in the rights issue) to the public. Estimate the earnings per share that SmallTech would have had with this alternative.
c. As a stockholder, are you concerned about the fact that the rights issue results in lower earnings per share than the general subscription offering (described in (b)).