The Coatesville Company has decided to sell additional common stock through a rights offering. The company has 12 million shares outstanding and plans to sell an additional 1.5 million shares through a rights offering. Each shareholder will receive one right for each share currently held, and thus each right will entitle shareholders to purchase 0.125 shares. The Coatesville common stock is currently selling at $50 per share, and the subscription price of the rights will be $45 per share. Determine the theoretical value of the rights for the ex rights case.
A) $0.455
B) $0.50
C) $0.625
D) $0.556

Question

Quizplus · Accepted Answer

The theoretical value of a right in the ex-rights situation can be calculated using the formula: $$Value\ of\ a\ right = \frac{(Market\ Price - Subscription\ Price)}{(1 + Number\ of\ rights\ needed\ to\ buy\ one\ share)}$$. Here, Market Price = $50, Subscription Price = $45, and Number of rights needed to buy one share = 1/0.125 = 8. Plugging these values into the formula gives: $$Value\ of\ a\ right = \frac{($50 - $45)}{(1 + 8)} = \frac{$5}{9} = $0.556.$$

The Coatesville Company Has Decided to Sell Additional Common Stock