Question

1. Aaron services whose shares are presently trading on the Toronto stock exchange at a price of $60 per share (rights-on) has just announced a right offering .under the terms of the offering each shareholder will receive one right for every share held. In exchange for four rights, holders may purchase one common share for $56.Assume that you have $18,000 to invest.

1. How many rights can you purchase with the funds?
2. How many shares could you purchase with the fund?
3. If the price of the share goes to $64 per share(ex-rights) what will be your dollar value and % profit/Loss on your investment in rights and in shares?
4. If the price of the share goes to $55 per share(ex-rights) what will be your dollar value and % profit/Loss on your investment in rights and in shares?

Answer 1

Total amount that can be invested is$18000

I purchase 240 shares at a price of $60 per share (rights-on) =$(240*60)=$14400

So I get one right for every share held =240 right share

So in exchange for four rights i can purchase one common share for $56.

So I purchase (240/4)=60 common share at $56=$ (60*56)=$3360

Total investment$(14400+3360)=$17760

Total share purchased (240+60)=300

If share goes to $64 per share(ex-rights) then my dollar value will be (300shares*64)=$19200

profit =$(19200-17760)=$ 1440

%profit= (1440/17760)*100= 8.11%

If share goes to $55 per share(ex-rights) then my dollar value will be (300shares*55)=$16500

Loss =$(17760-16500)=$ 1260

%Loss= (1260/17760)*100= 7.09%