Mitsi Inventory Systems. Inc.. has announced a rights offer. The company has ann
ID: 2779230 • 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 $25. 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 $42 per share and the rights sell for $2 each 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 $ What is the value of one right? Calculate your answer based on the actual ex-rights price. (Do not round intermediate calculations.) Value of one right $ Are the rights underpriced or overpriced? Underpriced What is the amount of instant profit you can make on ex-rights day per share? Instant profit $Explanation / Answer
Stock price ex-rights:
= (Market value of share prior to right issue+Cash received from right share issue)÷Number of shares
= ($50+$25+$8)÷2
= $41.5
Value of one right:
= (Stock price-Subscription price)÷Number of rights required for 1 share
= ($42-$25)÷4
= $4.25
Share is overpriced, as ex-rights share price is only $41.5.
We can make a profit of $0.5 ($42-$41.5) per share