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Bulletin HASKINS & SELLS 61 Stock Rights IF the "inquiring reporter" were to ask ten accountants how proceeds from the sale of stock rights should be treated, nine probably would reply, "as a credit to other income." A recent engagement presented a situation in which a client, the recipient of a large number of stock rights, had disposed of the rights for a cash consideration, in lieu of exercising the subscription privilege himself. This provoked a discussion as to the correct accounting procedure in such cases. A stock right is a privilege granted by a corporation to its stockholders to subscribe to additional shares of its capital stock. A subscription price is named, less than the prevailing market quotations for outstanding shares; and the subscription is opened to all stockholders of record at a specified date, in proportion to their existing holdings. The issuance of stock rights not infrequently is resorted to by corporations in raising new capital. If new stock carrying a voting power is to be issued, it must necessarily be offered first to existing stockholders, in order to preserve their interests in the business. The recipients of the rights may exercise the privilege of subscribing for additional shares in accordance with the terms of the offer. If they prefer not to exercise the privilege themselves, they may sell the rights to others. A number of such sales usually takes place, and gives the rights a definite market value. When an announcement is first made of a privileged subscription, the rights thereto are dealt in on a "when issued" basis; that is, the contracts stipulate delivery and payment when the warrants are available. The stock subject to the rights is sold "rights on," which means that the quotations include the value of the rights. When the stock warrants are issued, they become the objects of separate transactions; and the stock is quoted "ex-rights," its price no longer including their value. Theoretically, the market value of a right would be determined somewhat as in the following illustration. A client bought 200 shares of Buckeye Mill stock at 125, the current market price. The Buckeye Mill Company then announced an increase of 50 per cent. in its capital stock, to be subscribed by its stockholders at 100. The client thereupon came into the possession of "200 rights," conferring on him the privilege of subscribing to 100 additional shares of Buckeye Mill stock at 100. Had he elected to exercise his privilege, he would have held 300 shares at a total cost of $35,000, an average cost of $116.67. He chose, however, to sell to another the privilege of buying the stock at a price lower than the market. He was willing to dispose of his rights for a consideration which would leave him in the same relative position with regard to average cost of shares held as if he had bought the additional shares himself. By a little mathematics he arrived at the conclusion that this consideration was $1,666.67, or, $8.33 per right. If he sold on that basis, he would hold 200 shares at a net cost of $23,333.33; that is, $25,000 original cost less $1,666.67 derived from sale of rights, or an average cost of $116.67. The price of $8.33 per right, in this case, is known as "parity." At that figure it is immaterial to a purchaser whether he
Object Description
Title |
Stock rights |
Author |
Anonymous |
Subject |
Stocks -- Accounting |
Citation |
Haskins & Sells Bulletin, Vol. 07, no. 08 (1924 August), p. 61-63 |
Date-Issued | 1924 |
Source | Originally published by: Haskins & Sells |
Type | Text |
Collection | Deloitte Digital Collection |
Digital Publisher | University of Mississippi Libraries. Accounting Collection |
Date-Digitally Created | 2009 |
Identifier | HS Bulletin 7-p61 |