Problem: Todd Winningham IV has $4,000 to invest. He has been looking at Gallagher Tennis Clubs, Inc., common stock. Gallagher has issued a rights offering to its common stockholders. Six rights plus $38 cash will buy one new share. Gallagher's stock is selling for $50 ex-rights.
Q1. How many rights could Todd buy with his $4,000? Alternatively, how many shares of stock could he buy with the same $4,000 at $50 per share?
Q2. If Todd invests his $4,000 in Gallagher rights and the price of Gallagher stock rises to $59 per share ex-rights, what would his dollar profit on the rights be? (First compute profits per right.)
Q3. If Todd invests his $4,000 in Gallagher stock and the price of the stock rises to $59 per share ex-rights, what would his total dollar profit be?
Q4. What would be the answer to part b if the price of Gallagher's stock falls to $30 per share ex-rights instead of rising to $59?
Q5. What would be the answer to part c if the price of Gallagher's stock falls to $30 per share ex-rights?