Stock rights;

              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