Question: Successful Enterprises currently has 15,000,000 common shares outstanding that trade at $12 per share. $ 1 8,000,000 of new equity capital is to be raised through a rights offering. Management has been debating whether to set the subscription price for the new shares at $11, $10 or $9 per share.
(a) For each alternative, compute the number of additional shares to be issued, the number of rights required for subscription to one new share, the minimum value of a right, and the market price per share ex rights.
(b) If, after the offering, total after-tax earnings for the coming year are expected to be $20,000,000, and dividends of $0.72 per share are to be maintained, compute the impact of various subscription prices on earnings per share and on total cash needed to pay dividends.
(c) What are the practical trade-offs in setting the subscription price?