In March 2020, Snow Fun, Inc., made a rights issue at a subscription price of $10 a share. One new share can be purchased for every 3 shares held. Before the issue, there were 12 million shares outstanding, and the share price was $15.
(1) What is the total amount of new money raised? (2 marks)
(2) What is the expected stock price after the rights are issued? Why is the stock price expected to fall after the right issue? (10 marks)
(3) Suppose that the company had decided to issue the new stock at $8 instead of $10 a share, how many new shares would it have needed to raise the same sum of money? Show that Snow Fun’s shareholders are just as well off if it issues the shares at $8 a share rather than $10. (8 marks)
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