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Chapter 5: 14BP-c (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.

c. If Todd invests his \)4,800 in Gallagher stock and the price of the stock rises to $70 per share ex-rights, what would his total dollar profit be?

Short Answer

Expert verified

Answer

The profit generated will be $288.

Step by step solution

01

Information available

Subscription price = $48

New price of one share = $70

Old share price = $66

Number of shares that can be purchased with $4,800 = 72

02

Calculation of the profit generated

The profit generated will be $288.

Profit per share=New share price-Old share price=$70-$66=$4

Profit generated=Profit per share×Number of shares=$4×72=$288

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