Question

Mr. and Mrs. Anderson own six shares of Magic Tricks Corporation’s common stock. The market value of the stock is

$70. The Andersons also have $56 in cash. They have just received word of a rights offering. One new share of stock can be purchased at $56 for each six shares currently owned (based on six rights).

(Do not round intermediate calculations and round your answers to the nearest whole dollar.)

a.	What is the value of a right?

Value per right

$

b.	What is the value of the Andersons’ portfolio before the rights offering? (Portfolio in this question represents stock plus cash.)

Portfolio value

$

c-1.	Compute the diluted value (ex-rights) per share.

Diluted value

$

c-2.	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?

Portfolio value

$

d.	If they sell their rights but keep their stock at its diluted value and hold on to their cash, what will be the value of their portfolio?

Portfolio value

$

rev: 03_30_2016_QC_CS-45469

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Question

Enterprise Storage Company has 570,000 shares of cumulative preferred stock outstanding, which has a stated

dividend of $10.75. It is six years in arrears in its dividend payments. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

a.	How much in total dollars is the company behind in its payments? (Do not round intermediate calculations. Input your answer in dollars, not millions (e.g., $1,234,000).)

Dividend in arrears

$

b.	The firm proposes to offer new common stock to the preferred stockholders to wipe out the deficit.

The common stock will pay the following dividends over the next four years:

D1	$1.80
D2	1.90
D3	2.00
D4	2.10

	The company anticipates earnings per share after four years will be $4.22 with a P/E ratio of 11.
	The common stock will be valued as the present value of future dividends plus the present value of the future stock price after four years. The discount rate used by the investment banker is 13 percent.

Compute the value of the common stock. (Do not round intermediate calculations and round your answer to 2 decimal places.)

Common stock

$

c.	How many shares of common stock must be issued at the value computed in part b to eliminate the deficit (arrearage) computed in part a? (Do not round intermediate calculations and round your answer to the nearest whole share.)

Number of shares of common stock

 

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