Canadian Securities Course (CSC) Level 1 Practice Exam

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What is the formula for the IV of a right during the ex-rights period?

  1. (Stock price - Subscription price) / (Number of rights to buy 1 share +1)

  2. (Number of rights to buy 1 share +1) / (Stock price - Subscription price)

  3. (Stock price + Subscription price) / Number of rights to buy 1 share

  4. (Subscription price - Stock price) / (Number of rights to buy 1 share +1)

The correct answer is: (Stock price - Subscription price) / (Number of rights to buy 1 share +1)

The correct answer reflects the appropriate calculation for the intrinsic value (IV) of a right during the ex-rights period. The intrinsic value of a right is designed to measure how much a right is worth in relation to the current market price of the stock and the price at which new shares can be subscribed for. The formula takes into account the stock price, which represents the value of one share in the market, and the subscription price, which is the price at which rights holders can purchase additional shares. By subtracting the subscription price from the stock price, you determine the benefit of exercising the right to buy a share. Dividing this difference by the total number of rights needed to purchase one share, which is effectively the cost of each right, plus one accounts for the existing share, yields the intrinsic value of each right. This formula effectively illustrates the monetary benefit of the rights offering by establishing a clear relationship between current shareholder value and potential purchase options through rights. The other choices do not accurately reflect the relationship between stock price, subscription price, and rights, which is crucial in determining the intrinsic value during the ex-rights period.

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