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The following question requires the calculation of the firm's market interactions through a rights offering provided to its shareholders and their maintained proportions of shares.
Show all of your work.
The firm Davis & Martin and Zanders, Inc. (DMZ) has just announced that it will issue 10 million shares of common stock through a rights issue at a subscription price of $20. Before the announcement, DMZ shares were trading at $26, and there were 50 million shares outstanding.
a. How many rights will DMZ grant to its existing shareholders?
b. How many rights will an investor need to buy one of DMZ’s shares?
c. What will happen to DMZ’s share price when the rights issue is announced?
d. What should be the value of one right?
Suppose you sell a fixed asset for $93,000 when it's book value is $116,000. If your company's marginal tax rate is 28%, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?
Find the price of the gap option under Black-Scholes framework.
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