The market price of K-T-Lew Corporation's common stock is $60 per share, and each share gives its owner one subscription right. Four rights are required to purchase an additional share of common stock at the subscription price of $54 per share. If the common stock is currently selling "rights-on," the theoretical value of a right is closest to:
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A. B. C. D.B
To determine the theoretical value of a right, we need to use the formula:
(Theoretical value of a right) = (Market price of a share with a right) - (Subscription price) / (Number of rights required to purchase one share + 1)
In this case, the market price of K-T-Lew Corporation's common stock is $60 per share and each share gives its owner one subscription right. Therefore, the market price of a share with a right is $60 + $1 = $61.
The subscription price to purchase an additional share of common stock is $54 per share, and four rights are required to purchase one share. Thus, the number of rights required to purchase one share plus one is 4 + 1 = 5.
Now, we can use the formula to calculate the theoretical value of a right:
(Theoretical value of a right) = ($61 - $54) / 5 = $1.40
Therefore, the closest answer is B. $1.20, which is the answer closest to $1.40. However, none of the given options match the exact value of $1.40. Answer A. $0.96 is too low, answer B. $1.20 is the closest but still below the actual value, answer C. $1.5 is too high, and answer D. $6.0 is way too high.