Question

Problem 15-15 Valuing a Right [LO4]

4. 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 $53. At the close of business the day before the ex-rights day, the company’s stock sells for $80 per share. The next morning, you notice that the stock sells for $65 per share and the rights sell for $2 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.) Stock ex-rights What is the value of a right? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Value of a rightſ Are the rights underpriced or overpriced?

Answer 1

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127 ke - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins - 2x % Cut Σ AutoSum : A Calibri 11 A A = = = V Wrap Text General Ea Copy Fill Paste B I U D A SF E Merge Merge & Center Center Format Painter $ - % % 4:0 .00 8. Conditional Format Cell Insert Delete Format Sort & Find & Formatting as Table Styles 2 Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing FJ130 EZ FA FB FC FD FE FE FG FH FLEJEK FLEM 124 125 126 PRICE OF STOCK EX RIGHT = (3 X 80) + (1 X 53) = 293.00 3 RIGHTS NEEDED TO BUY A SHARE 128 129 PRICE OF STOCK EX RIGHT = 293/4 = 73.25 130 131 VALUE OF RIGHT = CURRENT PRICE - EX RIGHT PRICE VALUE OF RIGHT = 80- 73.25 = 6.75 133 134 RIGHTS ARE UNDERPRICED 135 BUY 3 RIGHTS FOR = 3 X 2 = 6 PAY SUBSCRIPTION PRICE = 53 AND BUY 1 SHARE TOTAL COST = 6 +53 = 139 NOW IMMEDIATELY SELL SHARE AT 65 140 SO IMMEDIATE PROFIT = 65 -59= 141 142 HON KE CAPM UTILITY, SHARPE, beta convexity DGM betaport future INDEX INTL CAP BUD SANDRINE LEASING PV, FV, ANNUITY DIR right clean YIELD bond portfolio WACC RI O Rea ferences BO 130% - 2. 9 * * O ENG 01-12-2019 132 136 137 138 59