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

Question

Mr. and Mrs. Anderson own five shares of Magic Tricks Corporation's common stock. The market value of the stock is $62. The Andersons also have $44 in cash. They have just received word of a rights offering. One new share of stock can be purchased at $44 for each five shares currently owned (based on five rights). (Do not round intermediate calculations and round your answers to the nearest whole dollar.) a.What is the value of a right? Value per right b. What is the value of the Andersons' portfolio before the rights offering? (Portfolio in this question represents stock plus cash.) Portfolio value c-1. Compute the diluted value (ex-rights) per share. Diluted value 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? Portfolio value 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? Portfolio value

Explanation / Answer

M0 – S/ N+1

62-44/5+1

18/6

=$3

stock + cash = portfolio value

(5*62)+ 44= $354

   5 old shares sold at $62 per share (62*5) = $310

   1 new share will at $44                                  = $44

Total value of Six shares                                   = $354

Average value of one share $354/6             = $59

   Portfolio value – (6*59) + 0 = $354

D. if they sell their two rights but keep their stock at diluted value and hold on their cash.

stock (2*$59) - sale (2 *$3) = $128 - $6 = $122+ 44 = $166

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