Mr. and Mrs. Anderson own three shares of Magic Tricks Corporation\'s common sto

Question

Mr. and Mrs. Anderson own three shares of Magic Tricks Corporation's common stock. The market value of the stock is $70. The Andersons also have $58 in cash. They have just received word of a rights offering. One new share of stock can be purchased at $58 for each three shares currently owned (based on three rights).

(Do not round intermediate calculations and round your answers to the nearest whole dollar.)

What is the value of a right?

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?

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?

Mr. and Mrs. Anderson own three shares of Magic Tricks Corporation's common stock. The market value of the stock is $70. The Andersons also have $58 in cash. They have just received word of a rights offering. One new share of stock can be purchased at $58 for each three shares currently owned (based on three rights).

Explanation / Answer

a. Value of right = (Stock price - Right share price)/(Number of rights required + 1) = (70 - 58)/(3+1) = $3 per right

b. Value of portfolio before the offrings = 3 x 70 + 58 = $268

c-1. Ex-right per share = (Market price before the right + Cash raised)/Total number of shares after the right = (70+58)/(3+1) = $32 per share

c-2. Value of portfolio = 4 x 32 = $128

d. Value of Portfolio = 58 + (3 x 32) + (2 x 3) = $160

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