You currently own 200 shares of a stock valued at $21 a share.A rights offer has just been announced that grants the option of obtaining one new share for two rights plus $17.Each current share is entitled to one right.What is the value of each right?

Question

Quizplus · Accepted Answer

The value of each right can be calculated by first determining the value of exercising the rights to buy a new share at the discounted price, then finding the average price per share including the rights. With the offer, you can buy one new share for $17 using two rights. The current share price is $21. So, if you buy one share at $17 (discounted price), the total cost for three shares (two old shares + one new share at the discounted price) is $21*2 + $17 = $59. The average cost per share is $59/3 = $19.67. The difference between the current share price ($21) and the average price after exercising the rights ($19.67) is $1.33, which is the value of each right.

You Currently Own 200 Shares of a Stock Valued at $21