Mr. and Mrs. Anderson won five shares of Magic Tricks Corporation\'s common stoc

Question

Mr. and Mrs. Anderson won five shares of Magic Tricks Corporation's common stock. The market value of the stock is $60. The Andersons also have $48 in cash. They have just received word of a rights offering. One new share of stock can be purchased at $48 for each five shares currently owned (based on five rights). a. what is the value of a right? R= b. What is the value of the Anderson's portfolio before the rights offering? (Portfolio is stock plus cash) stock= cash= total portfolio value= c. 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? diluted value= stock= cash= total portfolio value= d. if they sell their five rights but keep their stock at its diluted value and hold on to their cash, what will be the value of their portfolio? stock= total proceeds from sale of 5 rights= cash= total portfolio value=

Explanation / Answer

a. R= Mo S N +1 $60 $48 $12 = = = $2 5 +1 $6 = $300 +48= $348
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b. Portfolio value Stock 5 $60

Cash Total Portfolio Value S17-16 17-15

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c. First compute diluted value:

Diluted value = Market value ex-rights Me = Mo R = $60- $2 = $58

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5 old shares sold at $60 per share 1 new share will sell at $48

Total value of 6 shares $300 48 $348

Average value of 1 share (Market value ex-rights) = $58

Portfolio value Stock 6 X $58 = Cash= $348

Total portfolio value

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d. Portfolio Value Stock= 5X $58 =$290

Proceeds from sale of 5 rights (5X $2)=10

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