Question

Boles Bottling Co. has issued rights to its shareholders. The subscription price is $40 and six...

Boles Bottling Co. has issued rights to its shareholders. The subscription price is $40 and six rights are needed along with the subscription price to buy one of the new shares. The stock is selling for $49 rights-on.


a. What would be the value of one right? (Do not round intermediate calculations and round your answer to 2 decimal places.)

Value of one right


b. If the stock goes ex-rights, what would the new stock price be? (Do not round intermediate calculations and round your answer to 2 decimal places.)

New Stock Price

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Homework Answers

Answer #1

Ans:

a. The Theoritical value of share right can be calculated using the below formula

Right Price = (SR - SP)/(N+1)

Where,

SR = Share Rights on Price

SP = Share Subscription Price

N = Number of rights needed to purchase new share

Share Rights on Price is $49, Share Subscription Price is $40 and Number of rights needed to purchase new share is 6

Hence value of one right = ($49 - $40) / (6 + 1) = $9/7 = $1.29

b. If the stock goes ex-rights, then the new stock price would be calculated as

SNP = SR – R

Where,

SNP = Share new price

SR = Share rights on price

R = Value of one right

Share rights on price is $49, value of one right is $1.29

Hence SNP = $49 - $1.29 = $47.71

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