Theo owns 300 shares of Cratic corp. His basis in the shares is $7,000. He is...

Theo owns 300 shares of Cratic corp. His basis in the shares is $7,000. He is given by the corporation rights to buy additional shares. At the time of the distribution the rights are worth $15,000 and Theo’s shares are worth $200,000.a) Does Theo have gross income as a result of the distribution and if so how much is it?b) What is the basis of the rights to Theo?

. Does the answer to the previous question change, and if so how, if the value of Theo’s stock at the time of the distribution was $60,000?19. What three things can Theo do with the rights?

. If the rights expire without any action on Theo’s part what if anything happensto any basis Theo might have in the rights?

Solutions

Expert Solution

Rights issue:A rights issue is an invitation to existing shareholders to purchase additional new shares in the company. This type of issue gives existing shareholders securities called rights. With the rights, the shareholder can purchase new shares at a discount to the market price on a stated future date. The company is giving shareholders a chance to increase their exposure to the stock at a discount price.

Until the date at which the new shares can be purchased, shareholders may trade the rights on the market the same way that they would trade ordinary shares. The rights issued to a shareholder have value, thus compensating current shareholders for the future dilution of their existing shares' value. Dilution occurs because a rights offering spreads a company’s net profit over a larger number of shares. Thus, the company’s earnings per share, or EPS, decreases as the allocated earnings result in share dilution.

a.Therefore Theo have the gross income as a result of distribution of the right issue i.e 15000$

b.Rights issue will be allocated among the existing shareholders on the basis of the number of shares they hold in the company. In the given case Theo will be allocated to rights issue w.r.t 300 shares he hold in that company.

c.Therefore my answer/rights allocation will not be changed even if value of the stock is 60000$( rights are allocated on basis of number of shares)

d.Theo will have three options with a rights issue. You can (1) subscribe to the rights issue in full, (2) ignore your rights, or (3) sell the rights to someone else. Below we explore each option and the possible outcomes.

e.If Theo dont the benefit of rights issue i.e ignorning the rights issue then post rights issue EPS will be reduced as the result of discount factor which is embedded in such rights issue, thereby value of the shares will get reduced accordingly.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Theo owns 300 shares of Cratic corp. His basis in the shares is $7,000. He is given by the corporation rights to buy additional shares.

Megan owns 200 of the 1,000 shares of Seabeach Corp. Her basis is $10,000. The corporation...

Megan owns 200 of the 1,000 shares of Seabeach Corp. Her basis is $10,000. The corporation declares a 10% stock dividend to the common stock holders. How many shares does Megan receive? What is Megan’s basis in the new shares received? What is Megan’s holding period in the new shares received? Would the answer change, and if so how, if Megan was given a choice to take the additional shares or their cash equivalent? NB/ PLEASE ANSWER BY DOING CALCULATIONS

Ben owns 1,000 shares of XYZ corp. worth $10,000. During the year he receives an additional...

Ben owns 1,000 shares of XYZ corp. worth $10,000. During the year he receives an additional 200 shares of this stock as a stock dividend. His shares are now worth $12,500. How much income does Ben have to income in income because of the stock dividend?

Corporation W owns 100% of the common stock of Corporation Z with a basis of $300....

Corporation W owns 100% of the common stock of Corporation Z with a basis of $300. Z owns a rental building (its only asset) with a gross fair market value of $3,000, subject to a non-recourse mortgage of $1,200. Z’s adjusted basis for this building is $900. Z has $600 of E&P. Z is on the accrual method of accounting and reports on the calendar year. Z and W do not report on a consolidated basis. Z distributes the building...

Steve purchased 300 shares of Delta stock on May 9. On May 15, he purchased another 300 shares and then on May 22 he purchased a final 400 shares of Delta shares.

Steve purchased 300 shares of Delta stock on May 9. On May 15, he purchased another 300 shares and then on May 22 he purchased a final 400 shares of Delta shares. The company declared a dividend of $1.60 a share on April 30 to holders of record on Friday, May 23. The dividend is payable on June 2. How much dividend income will Steve receive on June 2 from Delta shares?

Bill owns 449 shares of ABC Corp. They are currently 5,427 shares outstanding, with a share...

Bill owns 449 shares of ABC Corp. They are currently 5,427 shares outstanding, with a share price of $64. They have an EBIT of $48,779, which is expected to remain constant forever. The cost of debt for both Bill and ABC is 4.2%. ABC is currently 21% debt, but Bill would prefer that they were 66% debt. If Bill wishes to adjust his portfolio to make it behave as if ABC had his preferred capital structure, how much money would...

X Corp. owns 98 of the 100 outstanding shares of T Corp. common stock the only...

X Corp. owns 98 of the 100 outstanding shares of T Corp. common stock the only class outstanding. The other 2 shares are owned by unrelated shareholders. T has some assets with both gains and losses; assume the amount of the gains exceeds the amount of the losses. In Year 1, X engages in the following transactions. On March 1, it sells 30 shares of T stock to unrelated A for cash; on April 1, it sells 10 shares of...

Mr. Newton owns 80% of the shares of Ace Ltd. His wife, Mrs. Newton, owns 90%...

Mr. Newton owns 80% of the shares of Ace Ltd. His wife, Mrs. Newton, owns 90% of the shares of Cennential Inc. Mr. and Mrs. Newton each own 45% of the shares of Bellevue Company. Are any of the three companies associated? If yes, is there any way any of the companies can opt-out of being associated?

11: Sue owns 2000 shares of the 20 million outstanding common shares of ABC Corp. ABC...

11: Sue owns 2000 shares of the 20 million outstanding common shares of ABC Corp. ABC stockholders have preemptive rights. Now, ABC decides to sell 2 million new common shares through a rights offering. How many rights will Sue receive? a. 200 b. 0.20 c. 0.10 d. 20 18: Suppose we employ a "price-weighted" methodology to construct and track a two-stock index based on Stocks X and Y. Stock X has an initial...

Mort owns 500 shares of Pear, Inc. stock with an adjusted basis of $22,000. On July...

Mort owns 500 shares of Pear, Inc. stock with an adjusted basis of $22,000. On July 28, 2020, he sells 100 shares for $3,000. On August 16, 2020, he purchases another 100 shares for $3,400. Select the best answer below based on the fact pattern A. Mort has a tax loss of $1,400 and his basis on shares purchased on August 16 is $3,000 B. Mort's adjusted basis for the 100 shares purchased on August 16 is $4,800 and he...

Subjects