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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 $53. At the close of business the day before the ex-rights day, the company’s stock sells for $80 per share. The next morning, you notice that the stock sells for $65 per share and the rights sell for $2 each.

Required:
a. Are the stock and the rights correctly priced on the ex-rights day?
b. Describe a transaction in which you could use these prices to create an immediate profit.

Respuesta :

jepessoa

Answer:

a. Are the stock and the rights correctly priced on the ex-rights day?

stock price at ex-right = [(3 x $80) + $53] / 4 = $73.25

cost of ex-right = $80 - $73.25 = $6.75

the rights are underpriced since they are sold at $2, and they should sell at $6.75

b. Describe a transaction in which you could use these prices to create an immediate profit.

You can purchase 3 rights at $6 and then pay subscription price ($53) and you would have an stock at $59. Your profit = $65 - $59 = $6 per stock.

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