Todd Winham IV has $5,200 to invest. He has been looking at Gallagher Tennis Clu

Question

Todd Winham IV has $5,200 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 $58 cash will buy one new share. Gallagher’s stock is selling for $74 ex-rights.

a-1. How many rights could Todd buy with his $5,200? (Do not round intermediate calculations and round your answer to the nearest whole number.)
  

a-2. Alternatively, how many shares of stock could he buy with the same $5,200 at $74 per share? (Do not round intermediate calculations and round your answer to the nearest whole number.)
  

b. If Todd invests his $5,200 in Gallagher rights and the price of Gallagher stock rises to $82 per share ex-rights, what would his dollar profit on the rights be? (First compute profit per right.) (Do not round intermediate calculations and round your answer to the nearest whole dollar.)
  

c. If Todd invests his $5,200 in Gallagher stock and the price of the stock rises to $82 per share ex-rights, what would his total dollar profit be? (Use the rounded number of shares from part a-2. Do not round any other intermediate calculations and round your answer to the nearest whole dollar.)
  

d. If Todd invests his $5,200 in Gallagher rights and the price of Gallagher’s stock falls to $50 per share, ex-rights, what would his dollar profit on the rights be? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to the nearest whole dollar.)
  

e. If Todd invests his $5,200 in Gallagher stock and the price of Gallagher’s stock falls to $50 per share ex-rights, what would be his total dollar profit? (Negative amount should be indicated by a minus sign. Use the rounded number of shares from part a-2. Do not round any other intermediate calculations and round your answer to the nearest whole dollar.)
  

Explanation / Answer

Answer:-

(a-1) Per Right Formula are as follows:-

= $74 - $58 / 4

= $4 per Right

so, No. of Right are as follws :-

= Investment Amount / Per Right Value

= $5,200 / $4

= 1,300 rights todd could buy with his $5,200

(a-2) No. of Shares stock are as follws:-

= Investment Amount / Value Per Share

= $5,200 / $74

= 70 Shares of stock could he buy with the same $5,200 at $74 per share

(b) Per Right Value are as follws:-

= $82 - $ 58 / 4

= $6 Per Right Value

Now, Calculation of Profit Per Right Value are as follws:-

= $6 -$4

= $2 Profit Per Right Value

Now, Calculation of Total Profit on Rights

= 1,300 rights * 2 Profit per Rights

= $2,600 dollor Profit on Rights

(c) Calculation of Profit per Share are as follows:-

= $82 -$74

= $8 profit per share

Now Calculation of total dollor profit on shares are as follows:-

= $8 profit per share * 70 Shares

= $560 Total Dollor profit on shares

(d) Calculation of right value if stock falls to $50 per share are as follows:-

= $50 - $58 / 4

= -$2

So Right Value = 0

So, Todd lost all his $5,200 Investments.

(e) Calculation of loss per share are as follows :-

= $50 - $74

= -$24 loss per shares

Now, total shares loss are as follows:-

= -$24 * 70 shares

= -$1,680

So Todd loss $1680 from his $5,200 Investments.

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