Question

Knight Inventory Systems, Inc., has announced a rights offer. The company has announced that it will take three rights to buy a new share in the offering at a subscription price of $50. At the close of business the day before the ex-rights day, the company�s stock sells for $90 per share. The next morning, you notice that the stock sells for $65 per share and the rights sell for $3 each. What is the value of the stock ex rights? (Round your answer to 2 decimal places. (e.g., 32.16)) What is the value of the rights? What is the amount of instant profit you can make on ex rights day per share?

Answer 1

Compute the value of ex-right value as follows: number of rightxpricebefore ex-dight date+pricegbscdiption number of right +1 subscri Ex-right value 3x90+50 - 80 Tus, the ex-right value of stock is $80. Compute value of right as follows: Value right = pricebe fore ex-rightdate-priceex-rightdate $90 _ $65 $25 Thus, the value of right is $25. In order to make instant profit, buy three rights at the price of $3, for $9, and use these rights to purchase the share at subscription price of S50. Thus, total cost of share will be $59, and a profit of S6 could be earned by selling the stock in market for $65.