What is the value of rights in a rights issue? Explain stock splits, stock dividends, equity...

What is the value of rights in a rights issue? Explain stock splits, stock dividends, equity dilution = issue-related terminology

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Expert Solution

Value of the right = Market value – Average price

Example:

A company has decided to increase its existing share capital by making rights issue to its existing shareholders. The company is offering one new share for every two shares held by the shareholder. The market value of the share is Rs. 240 and the company is offering one share of Rs. 120 each.

Market value of the shares already held by shareholder (Rs. 240 x 2 shares) = Rs. 480

Add Price to be paid for buying one share = Rs. 120

Total shares (3 shares) = Rs. 600

Average price of one share: Rs. 600 / 3 = Rs. 200

Value of the right = Market value – Average price
= Rs. 240 – Rs. 200
Value of right = Rs. 40

Stock Split

A stock split is a decision by a company's board of directors to increase the number of shares that are outstanding by issuing more shares to current shareholders.

For example, in a 2-for-1 stock split, an additional share is given for each share held by a shareholder.

Stock Dividend

A stock dividend is a payment to shareholders that is made in shares rather than in cash. The stock dividend has the advantage of rewarding shareholders without reducing the company's cash balance.

Equity Dilution

Equity dilution refers to the cut down in the stock holding of shareholders in relative terms of a particular company, usually a startup, whenever an offering for new shares is made whether through an IPO, FPO or private equity.

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