FINA 3070 AB Corporate Finance: Theory and Practice

Homework 3 Answer Sheet

Tse Fuk Chun

Full Name: ______________________________

115517 6354
Student ID: ______________________________

Chapter 12: problem 12.

There is an Excel file “Homework3 data” for Table 12.2.
Run a regression using returns from January 2015 to June 0 296 . 0 .
2385
2017 to find the alpha and beta for each stock. Put your 15 α 8
1 4875 0 .

final answer in the boxes on the right.

.

Show your regression results below (You may copy and paste Excel image)

For Exeutive Cheese , = . 2962 + . 4875

y , 2962 4875
∴
β=
O

. α= 0 1
1

. .
i

× ,

1
小
 FINA 3070 AB Corporate Finance: Theory and Practice
Homework 3 Answer Sheet

: Fon Paddingon Beer , Y = . 2585 + , S 128 , α= 0 2S8 S 0 5128

β=
0
0

.
. .

x :

Calculate the abnormal return of each of the

2 stocks on the event month.
-
1 . 31245 % 1 25694%
.

For Executive Cheose

,
abnormal return =
3% -
(
0 .
2962 + 1 .
4875
-

2 .
7 )%
= -

1 31245%
.

7 )%
For PaddinghonBeer abormal return = .% ( 0 2585 + 0 5128 2
-

9
- .
.

, 2

≈ 1 .
23694%

The earnings of one of these stocks slightly

disappointed investors and the earnings of the
other were slightly better than expected.
Which was which?
Better
Disappointing

2
 FINA 3070 AB Corporate Finance: Theory and Practice
Homework 3 Answer Sheet

Chapter 14: problems 23-25

Problem 23. a. What was the total amount of new money raised? $ 12 ,
500 , 00

reqwind total amount

The 10 00 1000
:
5x g
,

$ 12 ,
500 ,
000

b. The rights issue gave the shareholder the opportunity to buy one new
share for less than the market price. What was the value of this $ 0 .
8
opportunity (the value of right)?

×
4

right
=

Thevale of 5
-

=$ 8 0 .

c. What was the prospective stock price after the issue?

$ 5 8 .

Compare the wealth of a shareholder before the rights issue versus his/her wealth after the rights issue (The
wealth of a shareholder includes the shareholder’s money that will be used to exercise the rights):

10 , 000 000 × 6+ 12 , 300 , 00

The
ryuirnedprospectiestock prie
,

+
0
10 000 000 10 000
, , ,
,

$5 8
.

d. How far could the total value of the company fall before
shareholders would be unwilling to take up their rights? $

$6 $s
The reyuired shue prie :
-

Xfall amountin =$ 1

3
一
 FINA 3070 AB Corporate Finance: Theory and Practice
Homework 3 Answer Sheet

Problem 24. Problem 23 contains details of a rights offering by Pandora Box. Suppose that the company
had decided to issue new stock at €4.
How many new shares would it have needed to sell to raise the same
了 123 000

sum of money?
,
,

The amommt of hen shmes : 12 500 , ,

000 ÷ 4

= 3 125
, ,
000

b. The rights issue gave the shareholder the opportunity to buy one new
share for less than the market price. What is the value of this $1 .
5238
opportunity (the value of right)?

exerise right one

The shue
000
: 10
,
nen Sor
了 125 000

buging
, .

= 3 2 . 1 share

right*
32
Thewabue of 4
:

: 6

=$ 1
. 523

c. What was the prospective stock price after the issue?

$ 5 .
52

Compare the wealth of a shareholder before the rights issue versus her wealth after the rights issue. (The
wealth of a shareholder includes the shareholder’s money that will be used to exercise the rights) :
10 , 0001000 × 6 + 12, 5001000

Theprospective sfckprice ! ( 010001000 多, 及 5 , 000

=$ 55α

d. How far could the total value of the company fall before
shareholders would be unwilling to take up their rights? $20 ,
000
,
000

$ $ 4)
The requied vahe : 6 10
-
× 000 000
, ,

=$ 20 ,
000 ,
00

4
十
 FINA 3070 AB Corporate Finance: Theory and Practice
Homework 3 Answer Sheet

Problem 25.
Suppose that instead of having a rights issue of new stock at €4 (see Problem 24), Pandora decided to
make a general cash offer at €4. Would existing shareholders still be just as well off? Explain.

No, it is because when the company decided to make a general cash

offer at $4, it conveys a signal that the they re-estimated the current
stock price of $6 to be too high compared to the true value of stock
price. Therefore, the stock price will drop after the announcement of
new share of GCO. Since the GCO benefits the public but not existing
shareholders, the existing shareholders will bear a capital loss of drop
of stock price.

5
 FINA 3070 AB Corporate Finance: Theory and Practice
Homework 3 Answer Sheet

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法
___________________ α 4 2034
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___________________
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Signature Date

Tse Fuk Chm

___________________ 1155176354
___________________
Name Student ID

Fina 3070
__________________ Corporale Einane : Theory & Practia
_______________________________________
Course code Course title

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