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 the ex date, the stock is trading at $24. The value of the right is:

A. $.45
B. $.50
C. $.55
D. $1.00

Answer 1

$0.45 (approx)

Step-by-step explanation:

Given:

Number of old share for 1 new share(N) = 10

Subscription price (S) = $19

Market Price(M) = $24

Value of right share = ?

Computation of value of one right share:

Value of one right share = (M-S) / (N + 1)

Value of one right share = ($24 - $19) / (10 + 1)

= $5 / 11

Value of one right share = $0.4545

= $0.45 (approx)

Answer 2

A. $.45

Explanation: Right shares refer to those shares offered by a company which confer a right on their employees, which they may exercise and buy company's shares at a reduced price than which those are offered in the market.

Right shares require fulfillment of certain employment conditions which pertain to the length of the service of the employees post which they become eligible.

The value of right shares can be determined using the following formula

`(current\ market\ value\ - exercise\ price)/(No\ of rights\ required\ to\ buy\ 1\ share\ +\ 1)`

Therefore, as on exercise date, the value of right is,

`(24\ -\ 19)/(10\ +\ 1)`

=
`(5)/(11)`

= $0.4545 or $0.45 approx