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Please do correct me if I get it right from your lecture on rights Issue (example 1):
1) Value of a right of $1.60 is a profit or gain for the shareholder when selling the shares in the market for which we paid rights issue cost of $3 knowing that the shares will trade in the Market at price $4.60 (Theoretical ex-rights price)
[BUT We have a choice of either sell the shares after taking up rights issue in the market at $4.60 OR sell the letter of rights issue to anybody at $1.60]
While Selling the “Letter of Rights Issue Shares” where Value of a right means that it is a price that we will sell the “Letter of Rights Issue” to another person (shareholder) while receiving $1.60 in return (which is a gain for me) for which the buying shareholder will pay further $3 cost of taking up rights shares to the company BUT in the Market these shares will have the value of $4.60 (for which he can sell it to somebody if he wants in the market)
2) Why would somebody buy the letter of rights issue shares of $1.60 from ME (shareholder) & then pay further $3 to the company knowing that the shares are going to be $4.60 price in the market BUT the shareholder receive nothing by paying $4.60 for the shares which will return him $4.60 if he sells it in the market (so what is the benefit?)
Correct me that HE will buy SHARES hoping that he is still getting shares for $4.60 otherwise he would be paying $5 (if he didn’t take up the rights shares)
What you have written in (1) is correct.
With regard to (2), appreciate that the TERP and the value of the rights are what should happen in theory, but in practice two things will affect the values (and I do explain this in the lectures).
Firstly (using the figures in your example), in practice the value of the rights will be slightly lower than $1.60 to encourage people to buy them. Otherwise they might as well just pay $4.60 and buy the shares directly, rather than pay $1.60 for the rights and then pay $3 to take up the shares.
Secondly the share price after the rights issue is likely to be higher than $4.60 (which will make the value of the rights higher as well). This is because the company is raising more money and will presumably invest it to expand the business. If shareholders think that it is being invested well then this will increase the share price after the rights issue.
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