Tricki Corp stock sells for $45 rights-on, and the subscription price is $35. Ten rights are required to purchase one share. Tomorrow the stock of Tricki will go ex-rights. What is the price of Tricki expected to be when it begins trading ex-rights?
A)$47.23
B)$44.00
C)$44.09
D)$45.00

Question

Quizplus · Accepted Answer

Before going ex-rights, the price of one share is $45, and 10 rights are required to purchase one share at a subscription price of $35. Therefore, the effective price of one share can be calculated as:
Effective Price = (10 x Subscription Price + Rights-on Price) / 11
Effective Price = (10 x 35 + 45) / 11
Effective Price = $40.45
After going ex-rights, the company will offer new shares without rights attached, which will lower the market value of the existing shares. Theoretically, the price drop should be equal to the value of the rights offered. In this case, each right is worth $5 ($45 - $35), and 10 rights are required for one share, so the price drop should be $50. Therefore, the expected market price of Tricki after going ex-rights is:
Expected Price = Rights-on Price - Price Drop
Expected Price = $45 - $50
Expected Price = $44
Among the given options, only option C is close to $44. Therefore, the best choice would be C.

Tricki Corp Stock Sells for $45 Rights-On, and the Subscription