1. You just started at a new position at a large investment bank. You have been assigned to help a senior analyst, Ms. Jones, on a Dutch Auction of shares for Thornton & Danaher Inc. The equity of the firm is currently closely held by the founding families and the senior managers, so there is no available market price. They are hoping to raise about $650,000,000. This represents about 20% of the firmâs current equity value. Ms. Jones has estimated that the firm equity is currently worth about $3,237,500,000 ($650,000,000 is about 20%). Of course, this is just an estimate, and the amount raised will depend on what the market will bear. They have decided to auction 10,200,000 shares, which will hopefully sell for about $65 per share. Thornton & Danaher will receive the proceeds from the sale of 10,000,000 of the shares, and your investment bank will receive the proceeds from the remaining 200,000 shares (a 2% commission). Your firm pitched the issue to several large private equity clients. Fourteen sealed bids were submitted, and you have sorted them by bid price. The results are shown below.
Bidder Price Shares
A $81.43 475,000 B $80.87 640,000 C $80.12 500,000 D $78.93 650,000 E $76.73 775,000 F $75.37 950,000 G $73.12 1,150,000 H $71.54 1,300,000 I $70.37 750,000 J $69.42 1,275,000 K $68.14 1,400,000 L $67.52 1,300,000 M $65.73 1,250,000 N $64.28 1,650,000
What marginal price will the 10,200,000 shares of Thornton & Danaher sell at in the Dutch Auction? Also, calculate the pro rata portion of shares that the winning bidders will receive for the number of shares they bid. How much money will Thornton & Danaher receive from the auction? What will your investment bank receive?
2. You work in the Finance Department for Flynn, Inc. Your firm needs to raise $4,200,000,000 ($4.20B) to finance new capital investments. Your boss is considering raising this capital using a rights offering. He has asked you to analyze the effect of such an offering on the firmâs shareholders. The firm has 647,000,000 shares outstanding. These are currently selling on the stock exchange for $34.82. Calculate the current market value of firm equity. To raise the needed $4,200,000,000 in new capital, your boss is considering issuing new shares at a subscription price of $30 in the rights offering. How many new shares will the firm need to issue to raise the $4,200,000,000? Calculate the number of rights that will be needed to purchase a new share. During the subscription period, what will be the market value of a right? After the rights offering, what will be the firm value? The number of outstanding shares? The share price?
