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September 2008 q 6

A

AaronD

Member
Hey,

For MCQ 6 I cant seem to work out where they're getting 1 mill?
upload_2018-9-21_18-43-24.png

Clarification here is appreciated!

Aaron
 
Last edited by a moderator:
The company needs to issue 1m shares. If the strike price was 1.30, they'd only issue 250k shares. If the strike price was 1.20, they'd then issue 650k shares - still not enough.

The strike price is the highest price at which all the stock can be allocated (Ch 6 p 8)

Hence 1m shares x strike price = 1m x $1 = $1m
 
Thanks Tess,

I still don't understand, if the tender is an offer for 500k shares at £1, surely the amount that is sold is 500k not 1 mill?
 
It says in the question that the company issues 1m shares by tender, so the company will want to sell 1m shares, not just 500k. If they only issued 500k they would be short of the 1m that they were trying to issue.
 
So they sell 500k at £1 to those from the tender and then release the remaining shares at the same price (to general public)?
 
There were other people who were willing to pay $1.20 and $1.30 for shares respectively. They will be happy that they can now buy them at $1 instead of $1.20 / $1.30.

500k + 400k + 250k = 1150k shares that people are willing to buy at $1

The company only needs to sell 1m shares, so the tender offer is slightly oversubscribed with people offering to buy 1.15m shares when there's only 1m shares available. The company will probably apply a proportional percentage to allocate the shares by saying something like 'everyone who applied for 100 shares at or above the strike price of $1 will actually get 87 shares'. Irrespective of the allocation method, the company will still sell 1m shares for $1 to some or all of the people participating in the tender process.
 
That makes sense, thanks so much for clearing that up, knew there was something I was missing!

Aaron
 
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