Mitsi Inventory Systems, Inc., has announced a rights offer. The company has ann
ID: 2734227 • Letter: M
Question
Mitsi Inventory Systems, Inc., has announced a rights offer. The company has announced that it will take four rights to buy a new share in the offering at a subscription price of $29. At the close of business the day before the ex-rights day, the company’s stock sells for $50 per share. The next morning, you notice that the stock sells for $44 per share and the rights sell for $2 each.
45.80
What is the amount of instant profit you can make on ex-rights day per share?
Mitsi Inventory Systems, Inc., has announced a rights offer. The company has announced that it will take four rights to buy a new share in the offering at a subscription price of $29. At the close of business the day before the ex-rights day, the company’s stock sells for $50 per share. The next morning, you notice that the stock sells for $44 per share and the rights sell for $2 each.
Explanation / Answer
What is the value of the stock ex-rights? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Stock price ex rights Number of Rights offer 4 Shares Subscribtion price $29 per share Closing price before Ex-Right $50 per share Stock price ex rights = ((4 x $50)+$29)/(4+1) $45.8 per share What is the value of one right? Calculate your answer based on the actual ex-rights price. (Do not round intermediate calculations.) Closing price before Ex-Right $50 per share Stock Price Ex Right(calculated above) $45.8 per share Value of one right $4.2 per share Are the rights underpriced or overpriced? Underpriced What is the amount of instant profit you can make on ex-rights day per share? To create an immediate profit, (i) buy 4 rights at $2 for each and use these rights to purchase a new share at the subscription price of $29. (ii) Immediately sell the share in the ex-rights day for $44 Instant profit = $44-((4 x $2)+$29) $7 per share