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 $35. At the close of business the day before the ex-rights day, the company’s stock sells for $65 per share. The next morning, you notice that the stock sells for $55 per share and the rights sell for $3 each.

What is the value of the stock ex-rights? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

What is the value of a right? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

  

Are the rights underpriced or overpriced?

  

What is the amount of immediate profit you can make on ex-rights day per share? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

  

Answer 1

Ex-rights stock Price (No of Rights*old Price+Subscription Price)/Total shares = (3*65+35)/4 = $57.50 Value of One right Old price - Ex right Price = 65-57.5 = $ 7.50 = $ 8 Underpriced Instant Profit Buy 3 Rights and Purchase One share Sell share at 55 Profit = 3*3+35 = 55-44 = $