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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

01

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

02

Calculation of the value of one right

The value of one right is $3.14.

R=M0-SN+1=$70-$486+1=$227=$3.14

03

Calculation of the profit generated with increased share price

The profit generated will be $1,41.60.

Profit per right=New value of one right-Old value of one right=$3.14-$2.58=$0.56

Profit generated=Profit per right-Number of rights that can be purchased=$0.56脳1,860=$1,041.60

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The Hamilton Corporation Company has 4 million shares of stock outstanding and will report earnings of \(6,910,000 in the current year. The company is considering the issuance of 1 million additional shares that can only be issued at \)30 per share.

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