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Chapter 5: 14BP-e (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.

e. What would be the answer to part c if the price of Gallagher’s stock falls to \)40 per share ex-rights?

Short Answer

Expert verified

Answer

The loss generated will be -$1,872.

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

Number of rights that can be purchased = 1,860

02

Calculation of the profit generated

The loss generated will be -$1,872.

Loss per share=New share price-Old share price=$40-$66=-$26

Loss generated=Loss per share×Number of shares=-$26×72=-$1,872

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