Case problem #7 - related to chapter 17
Crandall Corporation (rights offering and the impact on shareholders)
The Crandall Corporation currently has 100,000 shares outstanding that are selling at $50 per share. It needs to
raise $900,000. Net income after taxes is $500,000. Its vice-president of finance and its investment banker have
decided on a rights offering, but are not sure how much to discount the subscription price from the current
market value. Discounts of 10 percent, 20 percent, and 40 percent have been suggested. Common stock is the
sole means of financing for the Crandall Corporation.
a. For each discount, determine the subscription price, the number of shares to be issued, and the number of
rights required to purchase one share.
b. Determine the value of one right under each of the plans.
c. Compute the earnings per share before and immediately after the rights offering under a
10 percent discount from the market price.
d. By what percentage has the number of shares outstanding increased?
e. Stockholder X has 100 shares before the rights offering and participated by buying 20 new shares. Compute
his total claim to earnings both before and after the rights offering (that is, multiply shares by the earnings
per share figures computed in part c).
