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ARE 171B Smithfield Foods currently has 2 million shares of common stock outstanding

Author:
June 8th, 2024

2. Smithfield Foods currently has 2 million shares of common stock outstanding, selling at a market price of $60/share. The firm has identified an attractive new project that will require $10 million in additional equity capital. To give its current shareholders the opportunity to maintain their current percentage of ownership, Smithfield will use a rights offering.a. Suppose the subscription price for the new shares is set at $40/share. How many new shares will the firm need to issue to meet its target for raising new capital? How many rights will be required to buy each new share of stock? What is the expected market price per share after the right offering is complete? What is the value of each right?b. Laura owns 1000 shares of Smithfield, prior to the rights offering. What is her proportional ownership of the firm at that time? And what is the total value of her shares before the rights offering?c. If Laura decides to exercise all of her rights, how much additional cash will she need to pay in to the firm? What is the new value of her portfolio, and what is her proportional ownership share of the firm?d. If instead, Laura decides to sell her rights, and just keep her original 1000 shares, what is the new value of her portfolio, and what is her proportional ownership share of the firm?

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