Question: The shares of P.X. Company are trading at $48 ex rights. Shareholders were offered one new share for every 4 shares held at a subscription price of $42.
(a) What is the minimum value of one right?
(b) Show that the wealth position of a shareholder should be unaffected by the rights offering, regardless of whether he chooses to exercise or to sell his rights.
(c) If a speculator, who has $6,480 to invest, believes that the price of P.X. shares should increase to $60 within a month, should she buy shares or rights, assuming that rights trade at $2.25 and have one month left to expiry? What are the trade-offs?