Question 12.1: Consider an investor having 1000 shares of some company for ...
Consider an investor having 1000 shares of some company for a total investment of 50,000 €. Stock price is therefore 50 €, and assume it did not change between date of purchase and date of rights issuance. If rights give a 1 to 1 subscription right, at an offer price of 25 €, the investor can buy additional 1000 shares of common stock at that price. By exercising the rights, he will pay 25,000 € to buy the new shares, and the average cost of the total portfolio per share will then be.
Although the price on the stock markets should reflect a new price of 37.5 €, the investor is actually not making any profit nor any loss. The right price will converge to an equilibrium price so as to match the new stock price. In many cases, the stock purchase right (which acts as an option) can be traded at an exchange.