ABC Company is currently quoted at 53 on NASDAQ. A Rights Offering has been decl
ID: 2719272 • Letter: A
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 failed to exercise his option.Explanation / Answer
1.Value of Right ,Rights on
Market value of the shares already held by shareholder (53*100shares)
$5300
Add: Price to be paid for buying 20 shares(48*20)
$ 960
Total shares (120 shares)
$ 6260
Average price of one share =6260/120
=$ 52(approx)
Value of Right of one share =Market value of share –average price of one share
=53-52
=$ 1
2.Value of Right ,Rights off
=Ex-right price-rights issue price.
Ex right price=(120*53+48*20)/140
=$ 52
Value of Right ,Rights off=52-48
$ 4
3.Price of the stock,ex -rights
Ex right price=(120*53+48*20)/140
4. NO of share can be bought =10*10/4.92*1
=20 shares(approx)
5.To get new shares , Application for right issue shall be made on or before right issue closing date.
6. If he failed exercise the option , he would be effected as
a) Market price of share before right issue = 53
b) Market price of share after right issue =52
C) loss in share price =1
d) total (10 shares*1) = $ 10 per a round lot
Market value of the shares already held by shareholder (53*100shares)
$5300
Add: Price to be paid for buying 20 shares(48*20)
$ 960
Total shares (120 shares)
$ 6260