Todd winningham has $4,800 to invest. he has been looking at gallagher tennis cl

Question

Todd winningham has $4,800 to invest. he has been looking at gallagher tennis clubs, inc common stock. Gallagher has issued a rights offering to its common stockholders. Six rights plus $48 cash will buy one new share. Gallaghers stock is selling for $66 ex-rights.

A. How many rights could Todd buy with his $4,800? Alternatively, how many shares of stock could he buy with the same $4,800 at $66 per share?

B. If todd invests hiis $4,800 in gallagher rights and the price of gallagher stock rises to $70 per share ex-rights, what would his dollar profit on the rights be?

C. If todd invests his $4800 in gallagher stock and the price of the stock rises to $70 per share ex-rights, what would his total dollar profit be?

D. What would be the answer to part B if the price of Gallaghers stock falls to $40 per share ex rights instead of rising to $70?

E. What would be the answer to part C if the price of gallaghers stock falls to $40 per share ex-rights?

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A:

Value of Rights = Ex Rights Selling Price - Cash For 1 New Share/Number of Rights = (66 - 48)/6 = $3 per right

Number of Rights = Value of Investment/Value of Right = 4800/3 = 1600 Rights

Number of Shares = Value of Investment/Value Per Share = 4800/66 = 72.73 shares

Part B:

Value of Rights = (Ex Rights Selling Price - Cash For 1 New Share)/Number of Rights = (70 - 48)/6 = 3.67 per right

Dollar Profit on Rights = Number of Rights*(Profit Per Right) = 1600*(3.67 - 3) = 1072

Part C:

Dollar Profit on Shares = Number of Shares*(Profit Per Share) = 72.73*(70 - 66) = 290.92 or 291

Part D:

Value of Rights = (Ex Rights Selling Price - Cash For 1 New Share)/Number of Rights = (40 - 48)/6 = -1.33 or 0

Since value of Right is 0, Todd would lose all the money.

Total Loss = -4800

Part E:

Dollar Loss on Shares = Number of Shares*(Profit Per Share) = 72.73*(40 - 66) = -1890.98 or -1891

Total Loss would be 1891 on 72.73 shares.

Thanks.

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