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).

c. 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?

Short answer

The value of the portfolio will be $162.

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 ex-rights market value

The ex-rights value of one share will be $54.

$\begin{array}{c}\mathrm{Ex}-\mathrm{rightsvalueofoneshare}=\frac{\mathrm{Valueofoldshares}+\mathrm{Valueofnewshare}}{\mathrm{Numberofshares}}\\ =\frac{\$58\times 2+\$46}{3}\\ =\frac{\$162}{3}\\ =\$54\end{array}$

Calculation of the value of portfolio

The value of the portfolio is $162

$\begin{array}{c}\mathrm{Portfoliovalue}=\mathrm{Stockvalue}\\ =\$54\times 3\\ =\$162\end{array}$