b6d83f54_l_Review_Flashcards___Cram_com___using_dividend_growth_model__
A is correct. The value of a stock right is the difference in the market value of the stock between the rights-on period (when rights can be exercised) and the ex-rights period (when rights are not exercised). The rights-on price of the stock is given at $14. To figure the ex-rights price, we look at the change in the holdings of one shareholder for simplicity. Before surrendering 5 rights, one shareholder has to hold at least 5 common shares. At $14 per share, a shareholder's total investment in Kruse is 5 × $14 = $70. After exercise of the rights for an additional share, the shareholder has invested $8 more into the company for a total investment of $78 in 6 common shares. The value of the common shares is now $78 ÷ 6 = $13 per share, ex-rights. The difference between the $14 per share rights-on and the $13 per share ex-rights is the value of one right at $1.
Kruse Corporation made a rights offering to its existing stockholders. Each stockholder received one right for each share of common stock owned. A stockholder will have to surrender five rights plus $8 to receive one new common share. Kruse Corporation's common stock is selling for $14 per share during the rights-on period. The theoretical value of one stock purchase right in the rights-on period is: A- $1.00. B- $1.20. C- $2.80. D- 1.60
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