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Using p ro as the rights on price and p s as the

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Using PROas the rights-on price, and PSas the subscription price, we can express the price per shareof the stock ex-rights as:PX= [NPRO+PS]/(N + 1)And the equation for the value of a right is:Value of a right =PROPXSubstituting the ex-rights price equation into the equation for the value of a right and rearranging, weget:Value of a right =PRO– {[NPRO+PS]/(N + 1)}Value of a right = [(N + 1)PRO– NPROPS]/(N+1)Value of a right = [PROPS]/(N + 1)16.Using the equation for valuing a stock ex-rights, we find:PX= [NPRO+PS]/(N + 1)PX= [4($75) + $40]/5PX= $68The stock is correctly priced. Calculating the value of a right, we find:Value of a right =PROPXValue of a right = $75 – 68Value of a right = $7
CHAPTER 19B-438So, the rights are underpriced. You can create an immediate profit on the ex-rights day if the stock isselling for $68 and the rights are selling for $6 by executing the following transactions:Buy four rights in the market for 4($6) = $24. Use these rights to purchase a new share at thesubscription price of $40. Immediately sell this share in the market for $68, creating an instant $4profit.
CHAPTER 20INTERNATIONAL CORPORATEFINANCEAnswers to Concept Questions1.a.The dollar is selling at a premium because it is more expensive in the forward market than in thespot market (Fr 1.53 versus Fr 1.50).b.The franc is expected to depreciate relative to the dollar because it will take more francs to buyone dollar in the future than it does today.c.Inflation in Switzerland is higher than in the United States, as are nominal interest rates.2.The exchange rate will increase, as it will take progressively more pesos to purchase a dollar. This isthe relative PPP relationship.3.a.The Australian dollar is expected to weaken relative to the dollar, because it will take more A$in the future to buy one dollar than it does today.b.The inflation rate in Australia is higher.c.Nominal interest rates in Australia are higher; relative real rates in the two countries are the same.4.A Yankee bond is most accurately described byd.5.Neither. For example, if a country’s currency strengthens, imports become cheaper (good), but itsexports become more expensive for others to buy (bad). The reverse is true for currency depreciation.6.Additional advantages include being closer to the final consumer and, thereby, saving ontransportation, significantly lower wages, and less exposure to exchange rate risk. Disadvantagesinclude political risk and costs of supervising distant operations.7.One key thing to remember is that dividend payments are made in the home currency. More generally,it may be that the owners of the multinational are primarily domestic and are ultimately concernedabout their wealth denominated in their home currency because, unlike a multinational, they are notinternationally diversified.

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Term
Spring
Professor
JoeSmolira
Tags
Balance Sheet, Depreciation, Corporate Finance, Generally Accepted Accounting Principles

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