Mitsi Inventory Systems, Inc., has announced a rights offer. The company has ann
ID: 2776884 • Letter: M
Question
Mitsi Inventory Systems, Inc., has announced a rights offer. The company has announced that it will take five rights to buy a new share in the offering at a subscription price of $25. At the close of business the day before the ex-rights day, the company’s stock sells for $55 per share. The next morning, you notice that the stock sells for $45 per share and the rights sell for $3 each.
A)What price should the stock sell for ex-rights? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16)
B) What is the amount of instant profit you can make on ex rights day per new share? (Do not round intermediate calculations.)
Explanation / Answer
Calculation of Ex rights price
=(55+25)/1.2
= 62.5
Rights are underpriced
instant loss is $7