Question

Mr and Mrs. Anderson own five shares of Magic Tricks Corporation's common stock. The market value of the stock is $60. The Andersons also have $42 in cash. They have just received word of a rights offering. One new share of stock can be purchased at $42 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. Wiat 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

Answer 1

Answer (a):

Value of right $3

Working:

Given that:

Current market price of the share is $60. The exercise price (or subscription price) is $42. Five rights are required to purchase one share.

Value per right is = ($60 - $42) / (5 + 1) = 18 / 6 = $3

Answer (b):

Portfolio Value $342

Working:

Value of Anedrson's portfolio before rights offering = $60 * 5 + $42 = $342

Answer (c -1):

Diluted Value $57

Working:

Diluted value (ex-rights) per share = (Value of shared already held + Value of right share) / Number of shares

= ($60 * 5 + $42) / 6

=$57

Answer (c-2):

Portfolio Value $342

Working:

Value of their portfolio, based on the diluted value (ex-rights) of the stock = 57 * 6 = $342

Answer (c-3):

Portfolio Value $336

Working:

Value of their portfolio = Diluted value (ex-rights) per share * 5 + Cash in hand + Value of 3 rights share

= 57 * 5 + 42 + 3 * 3

= $336