Question 1: A company has 100,000 shares oustanding, priced at $50 and wants to raise an additional $1 million to start another branch by rights offering. The company is considering a subscription price of $30 or $40. Answer the questions for both of these subscription prices:

(a) The value of the equity after the rights offering

(b) The number of rights needed to buy one of the new shares.

(c) The price of the right in each case.

(d) The price of the stock after the right offerings is complete.

(e) An investor owns 100 shares of the company before the rights issue. What is his proportional ownership if he exercises the rights? What is his proportional ownership if he doesn't exercise the rights?

(f) Do subscription prices matter? Why?

Question 2: Draw the payoffs and gains and losses of the following strategies. Discuss when you would use each of these strategies.

(a) Butterfly.

(b) Bull call spread.

(c) Short straddle

(d) Bear put spread