Image Storage Corporation has #1,000,000 shares outstanding. It wishes to issue 500,000 new shares using rights issue. If the current stock price is $50 and the subscription price is
$47/share, calculate the value of a right?
A) $0.40/right
B) $5.00/right
C) $2.50/right
D) $1.00/right

Question

Quizplus · Accepted Answer

The value of a right is calculated using the formula: (Current Stock Price - Subscription Price) / (Number of Rights Needed to Buy One New Share + 1). Here, the number of rights needed is 1,000,000 / 500,000 = 2. So, the value of a right is ($50 - $47) / (2 + 1) = $1.00.

Image Storage Corporation Has #1,000,000 Shares Outstanding