Image Storage Corporation has 1,000,000 shares outstanding. It wishes to issue 500,000 new shares using a (North American) rights issue. If the current stock price is $50 and the subscription price is $47/share, the value of a right is calculated explain and interpret the results in a one page memo to management. The newly issued shares which are offered to the existing shareholders are known as right shares.

Suppose the rights required to buy one share is (1,000,000 / 500,000 =) 2.

The value of right during the cum-rights period = (Stock price – Subscription price) / (Rights required + 1)

                                                                  = ($50 - $47) / (2 + 1)

                                                                  = $1

The value of right during the ex-rights period = (Stock price – Subscription price) / (Rights required)

                                                                = ($50 - $47) / 2

                                                                = $1.50