Chapter 5: 15BP-a (page 569)

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?

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Answer

The value of the right is $4.

Step by step solution

Subscription price = $46

Price of one share = $58

Rights required to purchase a new share = 2

The value of one right is $4.

$R = \frac{M_{0} - S}{N + 1} = \frac{$ 58 - $ 46}{2 + 1} = \frac{$ 12}{3} = $ 4$

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	Richmond	Car Rental Industry
Growth rate in earnings per share.....	15%	10%
Consistency of performance.............	Increased earnings 4 out of 5 years	Increased earnings 3 out of 5 years
Debt to total assets.....................	52%	39%
Turnover of product.........................	Slightly below average	Average
Quality of management..................	High	Average

Bailey corporation
Income statement
For the year 20X1
Sales (all on credit)	\(42,680,000
Cost of goods sold	\)32,240,000
Gross profit	\(10,440,000
Selling and administrative expenses	\)4,558,000
Operating profit	\(5,882,000
Interest expense	\)600,000
Net income before taxes	\(5,282,000
Taxes	\)2,120,000
Net income	\(3,162,000

Bailey corporation
Balance sheet
As of December 31, 20X1
Assets
Current assets:
Cash	\)250,000
Marketable securities	\(130,000
Accounts receivables	\)6,000,000
Inventory	\(8,300,000
Total current assets	\)14,680,000
Net plant and equipment	\(13,970,000
Total assets	\)28,650,000
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	\(3,800,000
Notes payable	\)3,550,000
Total current liabilities	\(7,350,000
Long-term liabilities	\)5,620,000
Total liabilities	\(12,970,000
Stockholder’s equity:
Common stock (1,800,000 shares at \)1 par)	\(1,800,000
Capital in excess of par	\)6,300,000
Retained earnings	\(7,580,000
Total stockholder’s equity	\)15,680,000
Total liabilities and stockholder’s equity	\(28,650,000