The current market price of a stock is $3.00.The rights issue is one-for-ten,priced at $2.80.Calculate the theoretical ex-rights price.

Question

Quizplus · Accepted Answer

When a rights issue is priced at $2.80 for each new share, it means that existing shareholders can purchase one new share for every ten shares they already own at a price of $2.80 per share. To calculate the theoretical ex-rights price, we use the formula:

[(Number of existing shares x current market price) + (Number of new shares x rights issue price)] / (Number of existing shares + Number of new shares)

[(10 x $3.00) + (1 x $2.80)] / (10 + 1) = $2.98

Therefore, the theoretical ex-rights price is $2.98, which is closest to choice C.

The Current Market Price of a Stock Is $3