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Mr. and Mrs. Anderson own four shares of Magic Tricks Corporation's common stock. The market value...

Mr. and Mrs. Anderson own four shares of Magic Tricks Corporation's common stock. The market value of the stock is $72. The Andersons also have $52 in cash. They have just received word of a rights offering. One new share of stock can be purchased at $52 for each four shares currently owned (based on four 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?

Solutions

Expert Solution

(a)
Right ratio = 1:4 (1 right share for 4 share held)
Value of a right = (Current market price - Right price) * Right ratio
(72 - 52) * 1 / 4
$5.00
So, Value of a right is $5.00
(b)
Value of portfolio = (No. of stock * Current market price ) + cash
(4 * 72) + 52
340
So, Value of portfolio is $340.00
©
Ex-rights price per share = (current market price * current share) + (right price * right shares) /   (Current share + right share)
((72 * 4) + (52 * 1 )) / (4 + 1)
340/5
$68.00
So, Ex-right price per share is $68.00
(d)
Value of portfolio = (current shares + right shares) * Ex-right price
(4 + 1 ) * 68
$340.00
So, Value of portfolio is $340.00
(e )
Selling price of rights = No. of rights * value of a right
2 * 5
$10.00
Value of portfolio = (Current shares * Ex-right price) + Cash + Sale price of rights
(4 * 68) + 52 + 10
$334.00
So, Value of portfolio is $334.00

jeff jeffy answered 1 year ago
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