14BP-a Todd Winningham IV has \(4,800 t... [FREE SOLUTION]

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Foundations Of Financial Management

Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen

Business Studies

16th Edition 路 768 pages

ISBN: 9781259277160

Chapter 5: 14BP-a (page 569)

Todd Winningham IV 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. Gallagher鈥檚 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?

Short Answer

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Answer

Todd can purchase 1,860 rights and 72 shares with an investment of $4,800.

Step by step solution

Information provided in the question

Money available for investment = $4,800

Subscription price = $48

Price of one share = $66

Rights required to purchase a new share = 6

Calculation of the value of one right

The value of one right is $2.58.

$\begin{array}{rcl} R & = & \frac{M_{0} - S}{N + 1} \\ = & \frac{$ 66 - $ 48}{6 + 1} \\ = & \frac{$ 18}{7} \\ = & $ 2.58 \end{array}$

Calculation of the number of rights that can be purchased

The number of rights that can be purchased is 1,860

$\begin{array}{rcl} Number of rights & = & \frac{Investment amount}{Value of one right} \\ = & \frac{$ 4, 800}{$ 2.58} \\ = & 1, 860 \end{array}$

Calculation of the number of shares that can be purchased

Todd can purchase 72 shares with the investment of $4,800 at the price of $66.

$\begin{array}{rcl} Number of shares & = & \frac{Investment}{Price of one shares} \\ = & \frac{$ 4, 800}{$ 66} \\ = & 72 \end{array}$

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Assets
	Book value	Liquidation value
Accounts receivables	\(1,400,000	\)1,200,000
Inventory	\(1,800,000	\)900,000
Machinery and equipment	\(1,100,000	\)600,000
Building and plant	\(4,200,000	\)2,500,000
Total assets	\(8,500,000	\)5,200,000

Liabilities and stockholder鈥檚 claims
Liabilities
Accounts payable	\(2,800,000
First lien, secured by machinery and equipment	\)900,000
Senior unsecured debt	\(2,200,000
Subordinated debenture	\)1,700,000
Total liabilities	\(7,600,000
Stockholder鈥檚 claims
Preferred stock	\)250,000
Common stock	\(650,000
Total stockholder鈥檚 claims	\)900,000
Total liabilities and stockholder鈥檚 claims	$8,500,000

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Short Answer

Step by step solution

Information provided in the question

Calculation of the value of one right

Calculation of the number of rights that can be purchased

Calculation of the number of shares that can be purchased

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