Problem:
Mr. and Mrs. Anderson own 4 shares of Magic Tricks corporations common stock. The market value of the stock is $50. The Anderson's also have $35 in cash. They have just received word of a rights offering. One new share of stock can be purchase dat $35 for each four shares currently owned (based on four rights)
Required:
Question 1: What is the value of a right?
Question 2: What is the value of the Andersons portfolio before the right offering?
Question 3: Compute the diluted value of the stock
Question 5: If the Anderson's participate in the rights offering, what will be the value of their portfolio, bsed on he diluted value( ex-rights) of the stock?
Question 6: If they sell their four rights but keep their stock at its diluted value and hold on to their cash, what will be the value of their portfolio?
Note: Provide support for your underlying principle.