Question

Problem 15-15 Valuing a Right [LO4]

Knight Inventory Systems, Inc., has announced a rights offer. The company has announced that it will take three rights to buy a new share in the offering at a subscription price of $55. At the close of business the day before the ex-rights day, the company’s stock sells for $90 per share. The next morning, you notice that the stock sells for $70 per share and the rights sell for $3 each.

What is the value of the stock ex-rights? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Stock ex-rights What is the value of a right? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Value of a right

Answer 1

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- 2x Σ AutoSum : A Cell Styles Insert Delete Format Fill 2 Clear Sort & Filter Editing Find & Select Cells F L FJFK FL FM ke - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Calibri 11 A A = = = V Wrap Text General Ea Copy Paste B I U D Format Painter A E Merge & Center $ - % 8. Conditional Format Formatting as Table Clipboard Font Alignment Number Styles FH159 for EZ FA FB FC FD FE FE FG FH 143 144 PRICE OF STOCK EX RIGHT = (3 X 90) + (1 X 55) = 146 3 RIGHTS NEEDED TO BUY A SHARE 147 148 PRICE OF STOCK EX RIGHT = 325/4 = 81.25 149 150 VALUE OF RIGHT = CURRENT PRICE - EX RIGHT PRICE VALUE OF RIGHT = 90 - 81.25 = 8.75 145 325 151 152 RIGHTS ARE UNDERPRICED 153 154 155 156 157 158 159 160 161 HON Rea BUY 3 RIGHTS FOR = 3 X3=9 PAY SUBSCRIPTION PRICE = 55 AND BUY 1 SHARE TOTAL COST = 9+55 = 64 NOW IMMEDIATELY SELL SHARE AT 70 SO IMMEDIATE PROFIT = 70-64 = convexity DGM betaport future INDEX INTL CAP BUD SANDRINE LEASING PV, FV, ANNUITY DIR right clean RI KE CAPM UTILITY, SHARPE, beta ferences YIELD bond portfolio WACC BOJ 130% - O _+ 0 ..Il 01-12-2019