Todd Winningham IV has $5,700 to invest. He has been looking at Gallagher Tennis
ID: 2794104 • Letter: T
Question
Todd Winningham IV has $5,700 to invest. He has been looking at Gallagher Tennis Clubs Inc. common stock. Gallagher has issued a rights offering to its common stockholders. Five rights plus $75 cash will buy one new share. Gallagher’s stock is selling for $85 ex-rights.
a-1. How many rights could Todd buy with his $5,700? (Do not round intermediate calculations and round your answer to the nearest whole number.)
a-2. Alternatively, how many shares of stock could he buy with the same $5,700 at $85 per share? (Do not round intermediate calculations and round your answer to the nearest whole number.)
b. If Todd invests his $5,700 in Gallagher rights and the price of Gallagher stock rises to $92 per share ex-rights, what would his dollar profit on the rights be? (First compute profit per right.) (Do not round intermediate calculations and round your answer to the nearest whole dollar.)
c. If Todd invests his $5,700 in Gallagher stock and the price of the stock rises to $92 per share ex-rights, what would his total dollar profit be? (Use the rounded number of shares from part a-2. Do not round any other intermediate calculations and round your answer to the nearest whole dollar.)
d. If Todd invests his $5,700 in Gallagher rights and the price of Gallagher’s stock falls to $52 per share, ex-rights, what would his dollar profit on the rights be? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to the nearest whole dollar.)
e. If Todd invests his $5,700 in Gallagher stock and the price of Gallagher’s stock falls to $52 per share ex-rights, what would be his total dollar profit? (Negative amount should be indicated by a minus sign. Use the rounded number of shares from part a-2. Do not round any other intermediate calculations and round your answer to the nearest whole dollar.)
Explanation / Answer
a-1. How many rights could Todd buy with his $5,700?
5*right+75=85 (Given in the question)
=> right = $2 => no. of rights that be bought with $5,700 = 5,700/2 = 2,850
a-2. Alternatively, how many shares of stock could he buy with the same $5,700 at $85 per share?
No. of share = 5,700/85 = 67 (approx)
b. If Todd invests his $5,700 in Gallagher rights and the price of Gallagher stock rises to $92 per share ex-rights, what would his dollar profit on the rights be?
Each right is bought for $2, the profit per right = 92-(85+2) = $5
Total profit = 2,850*5 = $14,250
c. If Todd invests his $5,700 in Gallagher stock and the price of the stock rises to $92 per share ex-rights, what would his total dollar profit be?
Profit per share = 92-85 = $7
Total profit = 67*7 = $469
d. If Todd invests his $5,700 in Gallagher rights and the price of Gallagher’s stock falls to $52 per share, ex-rights, what would his dollar profit on the rights be?
Loss on each right = (85+2)-52 = $35
Total loss = 2,850*35 = $99,750
e. If Todd invests his $5,700 in Gallagher stock and the price of Gallagher’s stock falls to $52 per share ex-rights, what would be his total dollar profit?
Loss = 67*(85-52) = $2,211
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