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Question) Monte Co is listed on a major stock exchange and the current share price of the company is $18. The company will immediately announce a one-for-three rights issue at an issue price of $12.
What will be the theoretical value of rights attached to each original share?
Answer: $1.50
But my answer was $4.50. The answer key stated that the $4.50 is for 3 existing shares. There we need to divide by 3 to get the value of right per share.
But, I don’t get it. How do they interpret that the $4.50 value of rights is for 3 existing shares? Is it because the prices given in the question didn’t state that those were the prices per share ?
The question says that it is a 1 for 3 rights issue!!
As I do explain in my free lecture, you can either be asked for the value of the rights for each new share (which is 4.50) or you can be asked for the value of the rights for each existing share. Since it needed 3 existing shares to get rights worth 4.50, that means the rights of worth 1.50 for each existing share.
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