The Andersons 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?
b. What is the value of the Andersons’ portfolio before the rights offering? (Portfolio in this question represents stock plus cash.)
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?
d. If they sell their two rights but keep their stock at its diluted value and hold onto their cash, what will be the value of their portfolio?