Question

Mr. and Mrs. Anderson own six shares of Magic Tricks Corporation's common stock. The market value of the stock is $76. The Andersons also have $62 in cash. They have just received word of a rights offering. One new share of stock can be purchased at $62 for each six shares currently owned (based on six rights). (Do not round intermediate calculations and round your answers to the nearest whole dollar.)

a. What is the value of a right?
  

b. What is the value of the Andersons’ portfolio before the rights offering? (Portfolio in this question represents stock plus cash.)
  

c-1. Compute the diluted value (ex-rights) per share.
  

c-2. If the Andersons participate in the rights offering, what will be the value of their portfolio, based on the diluted value (ex-rights) of the stock?
  

d. If they sell their two rights but keep their stock at its diluted value and hold on to their cash, what will be the value of their portfolio?
  

Answer 1

a.

Value of a right = (Current Stock price - Subscription price) / Number of right required

= ($76 - $62) / 6

= $14 / 6

= $2.33

Value of a right is $2.33.

b.

Value of portfolio = (6 × current stock price) + Cash

= (6 × $76) + $62

= $456 + $62

= $518

Value of portfolio before risght issue is $518.

c-1

Ex right price = [($76 × 6) + $62] / (6 + 1)

= $518 / 7

= $74

Ex right price is $74.

c-2

Value of portfolio after right = $74 × 7

= $518

Value of portfolio after right is $518.

d.

for purchas one share, six right required. So if they sale their two right then value of portfolio,

Value of portfolio = (6 × current stock price) + Cash + 2 × right price

= (6 × $76) + $62 + (2 × $2.33)

= $456 + $62 + $4.67

= $522.67

Value of portfolio become $522.67