Question

Todd Winningham IV has $5,400 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 $62 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 $5,400? (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 $5,400 at $80 per share? (Do not round intermediate calculations and round your answer to the nearest whole number.)

b. If Todd invests his $5,400 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 $5,400 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 $5,400 in Gallagher rights and the price of Gallagher’s stock falls to $54 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 $5,400 in Gallagher stock and the price of Gallagher’s stock falls to $54 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.)

Answer 1

Todd Winningham IV has $5,400 to invest. Assuming Todd is holding sufficient quantity of stock to buy right .

PT a-1 Right price =$62

Number of right share =5400/62 i.e.87.09 or 87 shares

PT a-2  price =$80

Number of right share =5400/80 i.e.67.5 or 67 shares

PTb Profit = ( New price- Purchase price)* Shares

=(86-62)*87 i.e.$2088

PTc Profit = ( New price- Purchase price)* Shares

=(86-80)*67 i.e.$402

Ptd Profit = ( New price- Purchase price)* Shares

=(54-62)*87 i.e. -$696

PTe Profit = ( New price- Purchase price)* Shares

=(54-80)*67 i.e. - $1742