Question

Mr. and Mrs. Anderson own two shares of Magic Tricks Corporation’s common stock. The market value of the stock is \(58. The Andersons also have \)46 in cash. They have just received word of a rights offering. One new share of stock can be purchased at $46 for each two shares currently owned (based on two rights).

a. What is the value of a right?

Short answer

Answer

The value of the right is $4.

Step-by-step solution

Information provided in the question

Subscription price = $46

Price of one share = $58

Rights required to purchase a new share = 2

Calculation of the value of one right

The value of one right is $4.

$$\begin{gathered} \mathbf{\text{R}}\mathbf{=}\frac{{\mathbf{\text{M}}}_{\mathbf{0}}\mathbf{-}\mathbf{\text{S}}}{\mathbf{\text{N}}\mathbf{+}\mathbf{1}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{58}\mathbf{-}\mathbf{\$}\mathbf{46}}{\mathbf{2}\mathbf{+}\mathbf{1}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{12}}{\mathbf{3}} \\ \mathbf{=}\mathbf{\$}\mathbf{4} \end{gathered}$$