Question

Todd Winningham IV has $6,600 to invest. He has been looking at Gallagher Tennis Clubs Inc. common stock Gallagher has issued a rights offering to its common stockholders. Four rights plus $76 cash will buy one new share. Gallagher's stock is selling for $88 ex- rights 4-1. How many rights could Todd buy with his $6,600? (Do not round intermediate calculations and round your answer to the nearest whole number.) Number of rights 2-2. Alternatively, how many shares of stock could he buy with the same $6,600 at $88 per share? (Do not round intermediate calculations and round your answer to the nearest whole number.) Number of shares

Answer 1

a-1). 4 rights + $76 will buy one share worth $88, so

4R + 76 = 88

R = (88-76)/4 = $3

Each right is worth $3.

Number of rights which can be bought = 6,600/price per right = 6,600/3 = 2,200 rights

a-2). Number of shares which can be bought = 6,600/price per share = 6,600/88 = 75 shares

b). If share price becomes 90 then

4R + 76 = 90

R = (90-76)/4 = 3.5 per right

Dollar profit = number of rights*(current price of a right - buying price of a right)

= 2,200*(3.5-3) = 1,100

c). If share price becomes 90 then

Dollar profit = number of shares*(current price per share - buying price per share)

= 75*(90-88) = 150

d). 4R + 76 = 68

R = (68-76)/4 = -2

The rights will be worthless so total loss = -6,600

e). If shares price becomes 68 then

total loss = 75*(68-88) = -1,500