Walker Machine Tools has 5 million shares of common stock outstanding. The current market price of Walker common stock is $42 per share rights-on. The company’s net income this year is $15 mil- lion. A rights offering has been announced in which 500,000 new shares will be sold at $36.50 per share. The subscription price of $36.50 plus 10 rights is needed to buy one of the new shares.
a. What are the earnings per share and price-earnings ratio before the new shares are sold via the rights offering?
b. What would the earnings per share be immediately after the rights offering? What would the price-earnings ratio be immediately after the rights offering? (Assume there is no change in the market value of the common stock, except for the change that occurs when the stock begins trading ex-rights.)