14BP-b 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-b (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.
b. If Todd invests his $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? (First compute profit per right.)

Short Answer

Expert verified

Answer

Todd will be able to generate a profit of $1,041.60.

Step by step solution

Information available

Money available for investment = $4,800

Subscription price = $48

Price of one share = $70

Old value of one right = $2.58

Number of rights that can be purchased = 1,860

Calculation of the value of one right

The value of one right is $3.14.

$\begin{array}{rcl} R & = & \frac{M_{0} - S}{N + 1} \\ = & \frac{$ 70 - $ 48}{6 + 1} \\ = & \frac{$ 22}{7} \\ = & $ 3.14 \end{array}$

Calculation of the profit generated with increased share price

The profit generated will be $1,41.60.

$\begin{array}{rcl} Profit per right & = & New value of one right - Old value of one right \\ = & $ 3.14 - $ 2.58 \\ = & $ 0.56 \end{array}$

$\begin{array}{rcl} Profit generated & = & Profit per right - Number of rights that can be purchased \\ = & $ 0.56 脳 1, 860 \\ = & $ 1, 041.60 \end{array}$

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Bailey corporation
Income statement
For the year 20X1
Sales (all on credit)	\(42,680,000
Cost of goods sold	\)32,240,000
Gross profit	\(10,440,000
Selling and administrative expenses	\)4,558,000
Operating profit	\(5,882,000
Interest expense	\)600,000
Net income before taxes	\(5,282,000
Taxes	\)2,120,000
Net income	\(3,162,000

Bailey corporation
Balance sheet
As of December 31, 20X1
Assets
Current assets:
Cash	\)250,000
Marketable securities	\(130,000
Accounts receivables	\)6,000,000
Inventory	\(8,300,000
Total current assets	\)14,680,000
Net plant and equipment	\(13,970,000
Total assets	\)28,650,000
Liabilities and stockholders鈥� equity
Current liabilities:
Accounts payable	\(3,800,000
Notes payable	\)3,550,000
Total current liabilities	\(7,350,000
Long-term liabilities	\)5,620,000
Total liabilities	\(12,970,000
Stockholder鈥檚 equity:
Common stock (1,800,000 shares at \)1 par)	\(1,800,000
Capital in excess of par	\)6,300,000
Retained earnings	\(7,580,000
Total stockholder鈥檚 equity	\)15,680,000
Total liabilities and stockholder鈥檚 equity	\(28,650,000

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Short Answer

Step by step solution

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Calculation of the value of one right

Calculation of the profit generated with increased share price

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