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Part B (5 marks): Omer owns two shares of Arab bank Corporation's common stock
Part B (5 marks): Omer owns two shares of Arab bank Corporation's common stock. The market value of the stock is $58. Omer also has $46 in cash. He has 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). What is the value of a right? (1 mark) a. b. If Omer participates in the rights offering, what will be the value of his portfolio, based on the diluted value (ex-rights) of the stock? (2 marks) If he sells his two rights but keep their stock at its diluted value and hold onto their cash, what will be the value of his portfolio? (2 marks) c.
Expert Solution
a) Two rights allow Omer to purchase one share at $46 i.e. at $12 less than the current market price
Value of one right = ($58-$46)/(2+1) = $4
b) ex-rights value of the stock = (2*58+1*46)/3 = $54
Omer's participation in the rights enable him to purchase 1 stock at $46,
Thus value of Omer's portfolio , based on diluted value = $54*3 = $162
c) The two rights can be sold at $4*2 = $8
Thus, value of Omer's portfolio = 2 shares worth $54 + $46 cash + $8 profit from right sale
=2*54+46+8 = $162
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