Dunn Resources has issued rights to its shareholders. The subscription price is $\$60$ . Four rights are needed along with the subscription price of $\$60$ to buy one new share. The stock is selling for $\$72$ rights-on.

a. What is the value of one right?

b. After the stock goes ex-rights, what will the new stock price be?

Question

Dunn Resources has issued rights to its shareholders. The subscription price is $\$60$ . Four rights are needed along with the subscription price of $\$60$ to buy one new share. The stock is selling for $\$72$ rights-on.

a. What is the value of one right?

b. After the stock goes ex-rights, what will the new stock price be?

a. What is the value of one right?

b. After the stock goes ex-rights, what will the new stock price be?

Accepted Answer

a. [latex]\mathrm{R} =\frac{\mathrm{M}_{0}-\mathrm{S}}{\mathrm{N}+1}[/latex]

[latex]\begin{aligned}\mathrm{R} &= ext { Value of a right } \ \mathrm{M}_{0} &= ext { Market value rights-on. This is the value before the effect of the right offering, \$ 72. } \ \mathrm{S} &= ext { Subscription price } \$ 60 .\ \mathrm{N} &= ext { Number of rights necessary to purchase a new share 4. } \ \mathrm{R} &=\frac{\$ 72-60}{4+1}=\frac{\$ 12}{5}=\$ 2.40 \end{aligned} [/latex]

b. The market value of the stock ex-rights (after the effect of the rights offering) is equal to [latex]\mathrm{M}_{0}[/latex] (the market value before the rights offering) minus the value of a right (R).

[latex] \begin{aligned} \mathrm{M}_{\mathrm{e}} &=\mathrm{M}_{0}-\mathrm{R} \ \mathrm{M}_{\mathrm{e}} &= ext { Market value of the stock ex-rights } \ \mathrm{M}_{0} &=\$ 72 \ \mathrm{R} &=\$ 2.40 \ \mathrm{M}_{\mathrm{e}} &=\$ 72-\$ 2.40=\$ 69.60 \end{aligned} [/latex]

Question 17.2: Dunn Resources has issued rights to its shareholders. The su...

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