Question
A company announces rights issue in the ratio of 1:4. The face value of the share is Rs.10 and market value is Rs.70. If the rights issue is done at Rs.50, what is the value of the right?
Solution
Given: •Rights ratio = 1:4 i.e. For every 4 existing shares, 1 rights issue share can be bought •Face value = Rs.10 (not needed for calculation here) •Market price (MP) = Rs.70 •Rights issue price = Rs.50 Value of right can be calculated in 2 ways: Method 1: Direct formula  
Method 2: Find theoretical ex-rights price 
Therefore, Value of right = Market price – Theoretical ex-rights price = ₹70 – ₹66 = ₹4
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