Knight Inventory Systems, Inc., has announced a rights offer. The company has an

Question

Knight Inventory Systems, Inc., has announced a rights offer. The company has announced that it will take Two rights to buy a new share in the offering at a subscription price of $57. At the close of business the day before the ex-rights day, the company’s stock sells for $75 per share. The next morning, you notice that the stock sells for $61 per share and the rights sell for $2 each.

What is the amount of instant profit you can make on ex rights day per share?

Knight Inventory Systems, Inc., has announced a rights offer. The company has announced that it will take Two rights to buy a new share in the offering at a subscription price of $57. At the close of business the day before the ex-rights day, the company’s stock sells for $75 per share. The next morning, you notice that the stock sells for $61 per share and the rights sell for $2 each.

Explanation / Answer

1. Value ex right = Ex rights price - Subscription price = 75 -57 = 18

2. Value of rights = Current Price - Subscription Price = 61 - 57 - 2 = 2

3. Since the value of rights is positive, we can easily classify rights are under priced.

4 Instant profit made on ex rights day = 61 - 57 = $4

i.e. buy at 57 and sell at 61

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