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Question 15.3: In Example 15.2, suppose the rights sell for only $2 instead...

In Example 15.2, suppose the rights sell for only $2 instead of the $2.50 we calculated. What can you do?

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You can get rich quickly because you have found a money machine. Here’s the recipe: Buy five rights for $10. Exercise them and pay $25 to get a new share. Your total investment to get one ex-rights share is 5 × $2 + 25 = $35. Sell the share for $37.50 and pocket the $2.50 difference. Repeat as desired.

Related Answered Questions

Question: 15.1

In the National Power example, suppose the subscription price is set at $8. How many shares will have to be sold? How many rights will you need to buy a new share? What is the value of a right? What will the price per share be after the rights offer? ...

Verified Answer:

To raise $5 million, $5 million/$8 = 625,000 share...
Question: 15.2

The Lagrange Point Co. has proposed a rights offering. The stock currently sells for $40 per share. Under the terms of the offer, stockholders will be allowed to buy one new share for every five that they own at a price of $25 per share. What is the value of a right? What is the ex-rights price? ...

Verified Answer:

You can buy five rights-on shares for 5 × $40 = $2...
Question: 15.S-TP.2

Rights Offerings The Hadron Corporation currently has 3 million shares outstanding. The stock sells for $40 per share. To raise $20 million for a new particle accelerator, the firm is considering a rights offering at $25 per share. What is the value of a right in this case? The ex-rights price? ...

Verified Answer:

To raise $20 million at $25 per share, $20 million...
Question: 15.S-TP.1

Flotation Costs The L5 Corporation is considering an equity issue to finance a new space station. A total of $15 million in new equity is needed. If the direct costs are estimated at 7 percent of the amount raised, how large does the issue need to be? What is the dollar amount of the flotation cost ...

Verified Answer:

The firm needs to net $15 million after paying the...