## Ex Rights

National Power's rights have a substantial value. In addition, the rights offering will have a large impact on the market price of National Power's stock. That price will drop by \$3.33 on the ex-rights date.

The standard procedure for issuing rights involves the firm's setting a holder-of-record date. Following stock exchange rules, the stock typically goes ex rights two trading days before the holder-of-record date. If the stock is sold before the ex-rights date—"rights on," "with rights," or "cum rights"—the new owner will receive the rights. After the ex-rights date, an investor who purchases the shares will not receive the rights. This is depicted for National Power in Figure 16.4.

As illustrated, on September 30, National Power announces the terms of the rights offering, stating that the rights will be mailed on, say, November 1 to stockholders of record as of October 15. Because October 13 is the ex-rights date, only those shareholders who own the stock on or before October 12 will receive the rights.

^ Exercising Your Rights: Part II

.—' The Lagrange Point Co. has proposed a rights offering. The stock currently sells for \$40 per share. Under the terms of the offer, stockholders will be allowed to buy one new share for every five that they own at a price of \$25 per share. What is the value of a right? What is the ex-rights price?

You can buy five rights on shares for 5 x \$40 = \$200 and then exercise the rights for another \$25. Your total investment is \$225, and you end up with six ex-rights shares. The ex-rights price per share is \$225/6 = \$37.50. The rights are thus worth \$40 - 37.50 = \$2.50 apiece.

example 163 I right on

-:—' In Example 16.2, suppose the rights sell for only \$2 instead of the \$2.50 we calculated. What can you do?

You can get rich quick, because you have found a money machine. Here's the recipe: Buy five rights for \$10. Exercise them and pay \$25 to get a new share. Your total investment to get one ex-rights share is 5 x \$2 + 25 = \$35. Sell the share for \$37.50 and pocket the \$2.50 difference. Repeat as desired.

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VI. Cost of Capital and Long-Term Financial Policy