Mr. and Mrs. Anderson own four shares of Magic Tricks Corporation's common stock. The market value of the stock is $74. The Andersons also have $54 in cash. They have just received word of a rights offering. One new share of stock can be purchased at $54 for each four shares currently owned (based on four rights).

Mr. and Mrs. Anderson own four shares of Magic Tricks Corporation's common stock. The market value of the stock is $74. The Andersons also have $54 in cash. They have just received word of a rights offering. One new share of stock can be purchased at $54 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?

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:

a.

R	= (M0 − S) / (N + 1)
	= ($74 − 54) / (4 + 1)
	= $4

b.

Portfolio value = (Number of shares owned × Price per share) + Cash

= (4 × $74) + $54

= $350

c-1.

Me = Mo − R

= $74 − 4

= $70

c-2.

Portfolio value = (Number of shares owned × Ex-rights price) + Cash

= (5 × $70) + $0

= $350

d.

Portfolio value = (Number of shares owned × Ex-rights price) + Cash from sale of rights + Original cash

= (4 × $70) + (4 × $4) + $54

= $350