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Immediate Profit for Mitisi Inventory Systems

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Mitisi Inventory Systems, Inc. has announced a rights offering. The company has announced that it will take four rights to buy a new share in the offering at a subscription price of $40. At the close of business the day before the ex-rights day, the company's stock sells for $80 per share. The next morning you notice that the stock sells for $72per share and the rights sell for $6 each. Are the stock and/or the rights correctly priced on the ex-rights day? Describe a transaction in which you could use these prices to create an immediate profit.

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The expert examines immediate profit for Mitisi inventory systems are examined.

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The ex-rights price is
P = (40+80*4)/(1+4) = 72

Value of the stock right = 80 - 72 = $8

Since the rights currently ...

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