Chapter 17, Problem 14P

a.

Summary Introduction

To calculate: The rights that Todd Winningham could buy with $4,800 as well as the number of shares he can buy with $4,800 at the rate of $66 per share of Gallagher Tennis Clubs Inc.

Introduction:

Right Shares:

It refers to the shares issued by corporations to their existing stockholders. It is also a type of invitation to existing shareholders for purchasing additional stocks of the company and is also termed as rights issue.

Share Price:

The highest price that an investor is wishes or agree to pay for one share of a company is termed as the share price. It is the current price used for the trading of such shares.

Answer to Problem 14P

Todd Winningham can buy 73 shares and 1,600 rights with $4,800 at the rate of $66 per share of Gallagher Tennis Clubs Inc.

Explanation of Solution

Calculation of the number of rights Todd can buy:

$\begin{array}{c}\text{Number of rights}=\frac{\text{Investment}}{\text{Value of one right}}\\ =\frac{4,800}{\$3}\\ =1,600\text{ rights}\end{array}$

Calculation of the number of shares Todd can buy:

$\begin{array}{c}\text{No}\text{. of shares}=\frac{\text{Investment}}{\text{Value of per share}}\\ =\frac{\$4800}{\$66}\\ =73\text{ shares}\end{array}$

Working Note:

Calculation of the value of one right:

$\begin{array}{c}\text{Value of one right}=\frac{\text{Selling Price}-\text{Subscription Price}}{\text{Number of rights}}\\ =\frac{\$66-\$48}{6}\\ =\frac{\$18}{6}\\ =\$3\text{ per right}\end{array}$

b.

Summary Introduction

To calculate: The profit on Todd’s investment in the rights if the price of the Gallagher stock rises to $70 per share ex-rights.

Introduction:

Right Shares:

It refers to the shares issued by corporations to their existing stockholders. It is also a type of invitation to existing shareholders for purchasing additional stocks of the company and is also termed as rights issue.

Answer to Problem 14P

The profit on Todd’s investment in the rights is $1,072 if the price of the Gallagher stock rises to $70 per share ex-rights.

Explanation of Solution

Calculation of the total profits on rights:

$\begin{array}{c}\text{Total profits on rights}=\text{Profit per right}\times \text{Number of rights}\\ =\$0.67\times 1,600\text{rights}\\ =\text{\$1,072}\end{array}$

Working Notes:

Calculation of profit per right:

$\begin{array}{c}\text{Profit per right}=\text{Value of per right}-\text{Value of ex-right}\\ =\text{\$3}\text{.67}-\$3\\ =\$0.67\end{array}$

Calculation of the value per right:

$\begin{array}{c}\text{Value of per right}=\frac{\text{Selling Price}-\text{Subscription Price}}{\text{Number of rights}}\\ =\frac{\$70-\$48}{6}\\ =\frac{\$22}{6}\\ =\$3.67\text{per right value}\end{array}$

c.

Summary Introduction

To calculate: The profit on Todd’s investment in the stocks if the price of the Gallagher stock rises to $70 per share ex-rights.

Introduction:

Share Price:

The highest price that an investor is wishes or agree to pay for one share of a company is termed as the share price. It is the current price used for the trading of such shares.

Answer to Problem 14P

The profit on Todd’s investment in the stocks is $292 if the price of the Gallagher stock rises to $70 per share ex-rights.

Explanation of Solution

Calculation of the total profits on shares:

$\begin{array}{c}\text{Total profits on shares}=\text{Profit per share}\times \text{Number of shares}\\ =\$4\times 73\text{shares}\\ =\text{\$292}\end{array}$

Working Notes:

Calculation of profit per share:

$\begin{array}{c}\text{Profit per share}=\text{Value of per share}-\text{Value of ex-share}\\ =\text{\$70}-\$66\\ =\$4\end{array}$

d.

Summary Introduction

To determine: The effect on Todd’s investment in the rights if the price of the Gallagher stock falls to $40 per share ex-rights instead of rising to $70.

Introduction:

Right Shares:

It refers to the shares issued by corporations to their existing stockholders. It is also a type of invitation to existing shareholders for purchasing additional stocks of the company and is also termed as rights issue.

Answer to Problem 14P

There will be a loss on Todd’s entire investment if the price of the Gallagher stock falls to $40 per share ex-rights instead of rising to $70.

Explanation of Solution

Calculation of the loss on rights:

$\begin{array}{c}\text{Loss on right}=\text{Loss per right}\times \text{No}\text{.of rights}\\ =-\$4\times 1600\\ =\left(\$6400\right)\end{array}$

Working Notes:

Calculation of loss per right:

$\begin{array}{c}\text{Loss per right}=\text{Value of per right}-\text{Value of ex-right}\\ =-\text{\$1}-\$3\\ =\left(\$4\right)\end{array}$

Calculation of the value of one right:

$\begin{array}{c}\text{Value of one right}=\frac{\text{Selling Price}-\text{Subscription Price}}{\text{Number of rights}}\\ =\frac{\$40-\$48}{6}\\ =\frac{-\$8}{6}\\ =\left(\$1\right)\text{per right value}\end{array}$

e.

Summary Introduction

To determine: The effect on Todd’s investment of the stocks if the price of the Gallagher stock falls to $40 per share ex-rights.

Introduction:

Right Shares:

It refers to the shares issued by corporations to their existing stockholders. It is also a type of invitation to existing shareholders for purchasing additional stocks of the company and is also termed as rights issue.

Share Price:

The highest price that an investor is wishes or agree to pay for one share of a company is termed as the share price. It is the current price used for the trading of such shares.

Answer to Problem 14P

There will be a loss of $1,898 on Todd’s investment in shares if the price of the Gallagher stock falls to $40 per share ex-rights.

Explanation of Solution

Calculation of total loss:

$\begin{array}{c}\text{Total loss on shares}=\text{Loss per share}\times \text{Number of shares}\\ =-\$26\times \$73\\ =\left(\text{\$1,898}\right)\end{array}$

Working Note:

Calculation of loss per share:

$\begin{array}{c}\text{Loss per share}=\text{Value of per share}-\text{Value of ex-share}\\ =\text{\$40}-\$66\\ =\left(\$26\right)\end{array}$