Final answer:
The value of a right in a rights issue such as ABCCo's 2-for-6 offer is calculated based on the difference between the current share price and the ex-rights price, divided by the number of rights required to buy a new share. For ABCCo, with a current share price of $28.43 and an offer price of $27.71, the value of the right is approximately $0.06.
Step-by-step explanation:
The value of the right during a rights issue is the value that a current shareholder can sell the right to buy additional shares at the discounted price. To calculate the value of a right in a rights issue, such as the ABCCo's offer, we need to establish the ex-rights price first. The ex-rights price is the average share price after the rights issue is accounted for and can be calculated using the formula:
Ex-rights price = [(Old shares × Old share price) + (New shares × Subscription price)] / (Old shares + New shares)
For ABCCo, the company made a 2-for-6 rights issue offer at $27.71 when it was trading at $33. ABCCo's ordinary share price is now $28.43. Assuming an investor holds 6 shares, they can buy 2 more at $27.71 each. Here's how we calculate the ex-rights price:
Ex-rights price = [(6 × $28.43) + (2 × $27.71)] / (6 + 2) = ($170.58 + $55.42) / 8 = $226 / 8 = $28.25
The value of each right, then, is the difference between the current share price and the ex-rights share price, divided by the number of rights required to buy a new share (in this case, 6/2 = 3). Therefore, the value of one right is:
Value of one right = ($28.43 - $28.25) / 3 = $0.18 / 3 = $0.06
The value of the right, when rounded to the nearest cent, is $0.06.