Mr. and Mrs. Anderson own 4 shares of Magic Tricks corporations common stock. Th

Question

Mr. and Mrs. Anderson own 4 shares of Magic Tricks corporations common stock. The market value of the stock is $50. The Anderson's also have $35 in cash. They have just received word of a rights offering. One new share of stock can be purchase dat $35 for each four shares currently owned (based on four rights)

a. What is the value of a right?

b. What is the value of the Andersons portfolio before the right offering?

c. Compute the diluted value of the stock

d. If the Anderson's participate in the rights offering, what will be the value of their portfolio, bsed on he diluted value( ex-rights) of the stock?

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

Explanation / Answer

Hi,

Please find the answers as follows:

Part A:

R = Mo-S/(N+1) = (50-35)/(4+1) = 3

Part B:

Portfolio Value = 4*50 (Stock) + 35 (Cash) = 235

Part C:

Diluted Value = 50 - 3 = 47

Part D:

Portfolio Value = 5*47 = 235

Part E:

Portfolio Value = 4*47(Value of Stock) + 4*3(Sales Value of Right Shares) + 35(Cash) = 235

Thanks.

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