Question

Todd Winningham IV has \(4,800 to invest. He has been looking at Gallagher Tennis Clubs Inc. common stock. Gallagher has issued a rights offering to its common stockholders. Six rights plus \)48 cash will buy one new share. Gallagher’s stock is selling for \(66 ex-rights.

c. If Todd invests his \)4,800 in Gallagher stock and the price of the stock rises to $70 per share ex-rights, what would his total dollar profit be?

Short answer

Answer

The profit generated will be $288.

Step-by-step solution

Information available

Subscription price = $48

New price of one share = $70

Old share price = $66

Number of shares that can be purchased with $4,800 = 72

Calculation of the profit generated

The profit generated will be $288.

$\begin{array}{rcl}\mathbf{\text{Profit per share}}& \mathbf{=}& \mathbf{\text{New share price}}\mathbf{-}\mathbf{\text{Old share price}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{70}\mathbf{-}\mathbf{\$}\mathbf{66}\\ & \mathbf{=}& \mathbf{\$}\mathbf{4}\end{array}$

$\begin{array}{rcl}\mathbf{\text{Profit generated}}& \mathbf{=}& \mathbf{\text{Profit per share}}\mathbf{\times }\mathbf{\text{Number of shares}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{4}\mathbf{\times }\mathbf{72}\\ & \mathbf{=}& \mathbf{\$}\mathbf{288}\end{array}$