Question

XYZ Corporation has declared a rights offering to stockholders of record on Wednesday, November 15th. Under the offer, shareholders need 5 rights to subscribe to 1 new share at a price of $24. Fractional shares can be rounded up to purchase 1 full share. A customer owning 200 shares wishes to subscribe. The market price of the stock is currently $34. The customer can buy:

Answer 1

A customer owning 200 shares in XYZ Corporation can subscribe to 40 new shares using their rights. For Babble, Inc., an investor may pay the sum of the present value of expected profits divided by the number of shares. Net profit per share from stock transactions is calculated after accounting for purchase and selling costs including transaction fees.

Step-by-step explanation:

When considering the rights offering from XYZ Corporation and the intention of a customer owning 200 shares to subscribe, we must calculate how many new shares can be acquired. The customer has 200 shares and needs 5 rights for 1 new share. Thus, the customer can obtain 40 new shares (200/5). However, they are only looking to subscribe at the $24 offer price when the market price is $34, which indicates a potential discount provided by the rights offering.

In the case of Babble, Inc., to determine what an investor will pay for a share of stock, we sum the present value of the expected profit payouts. The profits are $15 million immediately, $20 million after one year, and $25 million after two years. These amounts need to be discounted back to present value and divided by the number of shares (200) to reveal the value per share. With no discount rate provided, we assume no time value of money, hence the investor may be willing to pay the total profit divided by the number of shares.

Regarding net profit from each stock transaction, it's calculated by subtracting the purchase cost including transaction fees from the selling price minus selling transaction fees, and dividing by the number of shares to find profit per share.

Answer 2

The customer can buy 40 shares at $960.

Step-by-step explanation:

Step 1: The number of shares the customer can buy can be calculate as follows:

NSCB = NSOC ÷ NSNS ......................................... (1)

Where;

NSCB = Number of shares a customer can buy = ?

NSOC = Number of shares owned by the customer = 200

NSNS = Number of shares needed to subscribe to one new share = 5

Substituting the values into equation (1), we have:

NSCB = 200 ÷ 5 = 40 shares

Therefore, The number of shares the customer can buy is 40 shares.

Step 2: The amount to pay for the number of shares the customer can buy can be calculated as follows:

ANSCB = NSCB × PNS .............................. (2)

Where;

ANSCB = Amount to pay for the number of shares the customer can buy = ?

NSCB = Number of shares a customer can buy = 40

PNS = Price of the new share = $24

Substituting the values into equation (2), we have:

ANSCB = 40 × 24 = $960

Therefore, the customer can buy 40 shares at $960.