Question

Boles Bottling Co. has issued rights to its shareholders. The subscription price is $45 and four rights are needed along with the subscription price to buy one of the new shares. The stock is selling for $55 rights-on.

What would be the value of one right?

Answer 1

To calculate the value of one right for Boles Bottling Co., subtract the subscription price from the market price and divide by the total number of rights needed to buy one share plus one, resulting in a value of $2 per right.

Step-by-step explanation:

The value of one right in the context of Boles Bottling Co. is calculated by considering the value of the stock rights-on and the subscription price. When a company issues rights to its shareholders, these rights give shareholders the ability to purchase additional shares of stock at a predetermined price (the subscription price), often lower than the current market value.

To calculate the value of one right, we use the formula: value of a right = (Market price – Subscription price) / (Number of rights needed to buy one share + 1).

Applying the formula to the given data:

• Market price (with rights) = $55
• Subscription price = $45
• Number of rights needed to buy one share = 4

The calculation is as follows:

Value of one right = ($55 - $45) / (4 + 1) = $10 / 5 = $2.