Example 161

Exercising Your Rights: Part I

In the National Power example, suppose the subscription price is set at $8. How many shares will have to be sold? How many rights will you need to buy a new share? What is the value of a right? What will the price per share be after the rights offer?

To raise $5 million, $5 million/8 = 625,000 shares will need to be sold. There are one million shares outstanding, so it will take 1 million/625,000 = 8/5 = 1.6 rights to buy a new share of stock (you can buy five new shares for every eight you own). After the rights offer, there will be 1.625 million shares, worth $25 million altogether, so the per-share value will be $25/1.625 = $15.38. The value of a right in this case is the $20 original price less the $15.38 ending price, or $4.62.

ex-rights date

The beginning of the period when stock is sold without a recently declared right, normally two trading days before the holder-of-record date.

holder-of-record date

The date on which existing shareholders on company records are designated as the recipients of stock rights. Also, the date of record.

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