The formula for determining the value of one stock right when the price of the stock is rights-on is If: Ron = market value of one right when the stock is selling rights-on.Pon = market value of one share of stock withrights-on.N = number of nights necessary to purchaseone share of stock.S = subscription price per share.If the market price of a stock is $50 per share, the subscription price is $40 per share, and three rights are necessary to buy an additional share of stock, the theoretical market value of one right used to buy the stock prior to the ex-rights date is
Answer(s): B
A company's stock trades rights-on for $50.00 and ex-rights for $48.00. The subscription price for rights holders is $40.00, and four rights are required to purchase one share of stock.The value of a right while the stock is still trading rights-on is
Answer(s): D
Until rights are actually issued, the stock trades rights-on, meaning that the stock and rights are inseparable. If P is the value of a share rights-on, S is the subscription price of a new share, and N is the number of rights needed to buy a new share, the value of a right when the stock is selling rights-on is (P - S) ÷ (N + 1). Thus, the value of a right when the stock is selling rights-on is $2.00 [($50-$40) ÷ (4 + 1)].
A company's stock trades rights-on for $50.00 and ex-rights for $48.00. The subscription price for rights holders is $40.00, and four rights are required to purchase one share of stock. The value of a right when the stock is trading ex-rights is
Answer(s): C
If a stock can be purchased for $48 on the open market, or for $40 with four rights, each right must be worth $2.00 ($8 savings ÷ 4 rights).
The market value of a share of stock is $50, and the market value of one right prior to the ex-rights date is $2.00 after the offering is announced but while the stock is still selling rights-on. The offer to the shareholder is that it will take three rights to buy an additional share of stock at a subscription price of $40 per share. If the theoretical value of the stock when it goes ex-rights is $47.50, then the shareholder
Answer(s): A
Plugging the amounts into the formula given in the preceding question produces a theoretical value of $2.50 per right, which leaves a theoretical value of $47.50 for the stock.($50 - $40) ÷ (3 + 1)= $2.50However, if the stock declines to $47.50 when the right is worth only $2, the original investor is worse off than before the rights issuance, i.e., the investor would have only $49.50 worth of investments. Hence, the original shareholder receives no benefit from the issuance of the rights.
Growl Corporation's $1,000 par value convertible debentures are selling at $1,040 when its stock is selling for $46.00 per share. If the conversion ratio is 20, what will be the conversion price?
The conversion price is the assumed price of the stock, which was set at the time the bonds were issued. Dividing the $1,000 face value by the 20 shares results in a conversion price of $50.
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