Todd Winningham IV has $5,600 to invest. He has been looking at Gallagher Tennis
ID: 2792894 • Letter: T
Question
Todd Winningham IV has $5,600 to invest. He has been looking at Gallagher Tennis Clubs Inc. common stock. Gallagher has issued a rights offering to its common stockholders. Seven rights plus $66 cash will buy one new share. Gallagher’s stock is selling for $80 ex-rights.
a-1. How many rights could Todd buy with his $5,600? (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 $5,600 at $80 per share? (Do not round intermediate calculations and round your answer to the nearest whole number.)
b. If Todd invests his $5,600 in Gallagher rights and the price of Gallagher stock rises to $86 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 $5,600 in Gallagher stock and the price of the stock rises to $86 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 $5,600 in Gallagher rights and the price of Gallagher’s stock falls to $58 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 $5,600 in Gallagher stock and the price of Gallagher’s stock falls to $58 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
a-1 Value of per rights = (Ex-rights price - Cash)/ Number of Rights
= (80 - 66)/7 = 2 Per rights
Number of rights to buy with 5600 = 5600/2 = 2800 Rights
a-2 Number of shares with 5600 at 80 Per share
= 5600/80 = 70 shares
If Todd invests his $5,600 in Gallagher rights and the price of Gallagher stock rises to $86 per share ex-rights, what would his dollar profit on the rights be?
Profit per Rights = New rights value - old rights value
(Ex-rights price - Cash)/ Number of Rights
= (86 - 66)/ 7 = 2.857142857
Profit per Rights = New rights value - Old rights value
= 2.857142857 - 2 = 0.857142857
Profit per rights = 0.857142857
Total profit = Number of rights* Profit per rights = 2800 *0.857142857 = 2399.9999996 = 2399.99
C)If Todd invests his $5,600 in Gallagher stock and the price of the stock rises to $86 per share ex-rights, what would his total dollar profit be?
New stock price - Old stock price = Profit per share
86 - 80 = 6 profit per share
Total profit = Total number of share * profit per share = 86 -80 = 6 per share
= 6 *70 = 420
If Todd invests his $5,600 in Gallagher rights and the price of Gallagher’s stock falls to $58 per share, ex-rights, what would his dollar profit on the rights be?
(Ex-rights price - Cash)/ Number of Rights
= (58 - 66)/7 = -1.142857. = -1.14There is no profit. Todd will loose his money.
If Todd invests his $5,600 in Gallagher stock and the price of Gallagher’s stock falls to $58 per share ex-rights, what would be his total dollar profit?
= (58-80) = -22 loss per share
Total loss or profit = Loss per share or profit per share * Total number shares
= -22*70 = -1540
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