A owns 1000 shares in XYZ Ltd whose current share price (cum rights)is $2 per share.XYZ Ltd makes a one for four rights issue with a subscription price of $1.40 per share.Calculate the value of R,of the right to one new share.
A)8 cents.
B)40 cents.
C)48 cents.
D)84 cents.

Question

Quizplus · Accepted Answer

One for four rights issue means that for every four shares held, the shareholder is entitled to purchase one new share. In this case, A owns 1000 shares, so he is entitled to purchase 250 new shares (1000/4=250).
The subscription price for the new shares is $1.40 per share. Therefore, A needs to pay $1.40 x 250 = $350 to purchase the new shares.
The current share price (cum rights) is $2 per share. After the rights issue, the shares will trade ex-rights, which means that the value of the right needs to be deducted from the share price. The value of the right can be calculated as follows:
Value of the right = (Current share price - Subscription price)/(Number of rights required to purchase one new share + 1)
= ($2 - $1.40)/(4+1)
= $0.12
Therefore, the value of the right to one new share is $0.48 (4 x $0.12), which is Option C.

A Owns 1000 Shares in XYZ Ltd Whose Current Share