Question

Todd Winningham IV has $6,400 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 $74 cash will buy one new share. Gallagher’s stock is selling for $86 ex-rights.

a-1. How many rights could Todd buy with his $6,400? (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 $6,400 at $86 per share? (Do not round intermediate calculations and round your answer to the nearest whole number.)
  

b. If Todd invests his $6,400 in Gallagher rights and the price of Gallagher stock rises to $92 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 $6,400 in Gallagher stock and the price of the stock rises to $92 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 $6,400 in Gallagher rights and the price of Gallagher’s stock falls to $66 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 $6,400 in Gallagher stock and the price of Gallagher’s stock falls to $66 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

Based on the given information, we have 6 rights value + 74 = 86

So value of each right = ( 86 - 74 ) / 6 = 12 / 6 = 2 per right

a-1. How many rights could Todd buy with his $6,400?

= 6400 / 2 = 3200 Rights

a-2. Alternatively, how many shares of stock could he buy with the same $6,400 at $86 per share?

= 6400 / 86 = 74 shares

b. If Todd invests his $6,400 in Gallagher rights and the price of Gallagher stock rises to $92 per share ex-rights, what would his dollar profit on the rights be?

Profit per right = ( 92 - 86 ) / 6 = $ 1

Dollar profit on 3200 rights = 3200 * 1 = $ 3200

c. If Todd invests his $6,400 in Gallagher stock and the price of the stock rises to $92 per share ex-rights, what would his total dollar profit be?

= 74 shares acquired * ( 92 - 86 ) = $ 444

d. If Todd invests his $6,400 in Gallagher rights and the price of Gallagher’s stock falls to $66 per share, ex-rights, what would his dollar profit on the rights be?

Any one in possession of right have buy the stock at stated price of 74. But the same is available in the market at 66 without the need of rights. Thus rights are out of money. That means there is no value for rights, hence total investment in rights i.e 6400 is lost

Dollar value of loss = - 6400

e. If Todd invests his $6,400 in Gallagher stock and the price of Gallagher’s stock falls to $66 per share ex-rights, what would be his total dollar profit?

Dollar value of loss = 74 shares * ( 66 - 86 ) = $ - 1480

Note : don't forget to put negative sign for "d" and "e"

Kindly rate my work if it really helped you. Don't hesitate to comment for clarifications.