Question

ABC Corporation has declared a rights offering to stockholders of record on Friday, December 10th. Under the offer, shareholders need 10 rights to subscribe to 1 new share at a price of $19. Fractional shares can be rounded up to purchase 1 full share. As of Wednesday, December 1st, the stock is trading at $24.50. The value of the right is:

Answer 1

Answer:

10 existing share @ $24.50 = 245.00

1 new share @ $10.00          = 10.00

20                                             255.00

Theoretical ex-rights price = $255.00/20 = $12.75

Value of the right = Market price - Theoretical ex-rights price

                             = $24.50 - $12.75

                             = $11.75

Explanation:

In this respect, there is need to determine the theoretical ex-rights price. The theoretical ex-rights price is calculated as number of existing shares multiplied by the subscription price plus the number of rights multiplied by the current market price. Then, we will divide the total value of shares obtained by the total number of shares. finally, the value of a right is calculated as current market price minus theoretical ex-rights price.