Problem 20-18 Valuing a Right

Mitsi Inventory Systems, Inc., has announced a rights offer. The company has announced that it will take five rights to buy a new share in the offering at a subscription price of $25. At the close of business the day before the ex-rights day, the companys stock sells for $55 per share. The next morning, you notice that the stock sells for $45 per share and the rights sell for $3 each.

What price should the stock sell for ex-rights? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

Stock ex rights

$

What is the value of the rights? (Do not round intermediate calculations.)

Value of the rights

$

Are the rights underpriced or overpriced?

	Underpriced
	Overpriced

What is the amount of instant profit you can make on ex rights day per new share? (Do not round intermediate calculations.)

Instant profit

$