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In order to determine the value of one share after it is selling ex-rights, we need to subtract the value of the right from the price of the share when it was selling rights-on. The formula for determining the value of one stock right when the price of the stock is rights-on is Po ? Pn Vr = ———— r + 1 Where: Po = The market value of one share with the rights still attached Pn = The subscription (sales) price of a share r = The number of rights needed to buy one new share Vr = The value of one right when the stock is selling rights-on Putting the information from the question into the formula, we get [($60 ? $54) / (4 + 1)]. Solving the formula, we get $1.20 as the value of the right when the share is selling rights-on. Subtracting this $1.20 from the rights-on price, we get the value of the share when it is selling ex-rights. So, the value of the share ex-rights is $58.80 ($60 ? $1.20).
This was calculated using $1.50 as the value of a right while it is attached to the share. This $1.50 value of a right while it is attached to the share was calculated incorrectly as the difference between the market price of the stock and the subscription price divided by the number of rights required to purchase one share. This is not the correct way to calculate the value of a right while it is attached to the share. The difference between the market price of the stock and the subscription price should be divided by the number of rights required to purchase one share + 1.
This is the subscription price. See the correct answer for a complete explanation.
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