ABC Company is currently quoted at 53 on NASDAQ. A Rights Offering has been decl

Question

ABC Company is currently quoted at 53 on NASDAQ. A Rights Offering has been declared with an exercise price of 48, and 4.92 rights are needed to buy a new share. If you own 10 round lots of this company, answer the following: What is the value of a Right, Rights-On? What is the value of a Right, Rights-Off? What is the price of the stock, ex-rights? How many new shares can you buy? What actions do you take to get the new shares? Assume an investor has a round lot of the stock. Show how his total value would be affected if he fails to exercise his option.

Explanation / Answer

1. Value of a right

= (Stock Price - Rights subscription price per share) / (No. of rights required to buy one share + 1)

= (53-48) / (4.92 + 1)

= 0.84

2. Value of Right, Right off

= (Stock Price - Rights subscription price per share) / No. of rights required to buy one share

= (53-48) / 4.92

= 1.016

3. Price of the stock ex-rights = 53

4. No. of rights in one share = 0.84

No. of rights in 10 shares = 8.4

No. of shares in 4.92 rights = 1

No. of shares in 8.4 rights = (1/4.92)*8.4 = 1.71 shares

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