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Chapter 5: 14-BP-d (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’s stock is selling for \(66 ex-rights.

d. What would be the answer to part b if the price of Gallagher’s stock falls to \)40 per share ex-rights instead of rising to $70?

Short Answer

Expert verified

Answer

Todd will lose all his investment if the price of the share declines to $40.

Step by step solution

01

Information available

Money available for investment = $4,800

Subscription price = $48

Price of one share = $66

New share price = $40

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 -$1.14 and this will result in loss of investment by Todd.

R=M0-SN+1=$40-$486+1=-$87=-$1.14

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