Let's break down the question: - The investor **acquires 200 rights** of ABC Inc. - Each right gives him the right to acquire **one share at $20** (so, a subscription price of $20). - He **sells all 200 rights on the open market for $1.50 per right**. - ABC is trading for **$21.25** per share. **We are to calculate his capital gain per right.** ### Step 1: Cost Basis per Right The question **does not mention any cost to acquire the rights**. Normally, in a rights issue to existing shareholders, the rights are received **for free** (as an entitlement), unless otherwise stated. ### Step 2: Proceeds from Sale He sells each right for $1.50. ### Step 3: Capital Gain per Right Since the rights were acquired for **$0**, and sold at **$1.50**, the **capital gain per right = Sale Price - Cost Basis = $1.50 - $0 = $1.50**. --- ### **Final Answer** **c. $1.50** per right --- **Explanation:** Since the rights were received for free and sold for $1.50 each, the entire $1.50 per right is a capital gain.

1. Introduction: In financial markets, rights issues are a method by which companies raise additional capital by offering existing shareholders the opportunity to purchase additional shares at a predetermined price, known as the subscription price. When rights are distributed, shareholders receive rights that entitle them to buy a specified number of shares at the set price, often at a discount to the current market price. These rights are typically tradable on the open market, allowing shareholders to either exercise the rights or sell them to other investors. The value of these rights depends on the difference between the market price of the shares and the subscription price, as well as the trading price of the rights themselves. Understanding how to determine the capital gain or loss from selling rights involves analyzing the sale price of the rights, their intrinsic value, and any associated costs or benefits from exercising the rights. This knowledge is essential for investors to assess the profitability of their rights transactions and to make informed decisions regarding exercising or selling rights. Explanation: Rights issues provide shareholders with options—either to purchase additional shares at a discount (exercising the rights) or to sell the rights on the market. The value of these rights on the market, and the resultant capital gains or losses, depend on the interplay between the market price of the underlying shares, the subscription price, and the trading value of the rights themselves. Calculating capital gains involves understanding these relationships and quantifying the profit derived from selling rights, which is crucial for evaluating the financial outcome of rights transactions. 2. Identifying the Correct Option Among The Choices: The correct choice is **c. $1.50**. Explanation: The key to identifying the correct answer lies in understanding that the rights were received free of cost, as is typical in rights offerings, and subsequently sold on the open market. The capital gain per right is the difference between the sale price of the rights and their acquisition cost. Since the rights were acquired at no cost, the entire sale price contributes to the capital gain. Given that the rights were sold at $1.50 each, the capital gain per right equals $1.50. 3. A Step-by-Step Calculation: **Step 1: Determine the acquisition cost of the rights** - The rights are received as part of a rights issue; unless specified otherwise, rights are typically received free of charge for existing shareholders. - Therefore, the acquisition cost per right is considered $0. *Explanation:* Rights issued in a rights offering are usually distributed to shareholders at no initial cost, enabling them to either exercise the rights or sell them. Without any mention of a purchase price or premium paid, it is standard to assume rights were received free. --- **Step 2: Establish the sale price of the rights** - The rights are sold at $1.50 each on the open market. *Explanation:* The market trading price of rights reflects their current valuation based on the underlying share price, the subscription price, and market expectations. Selling at $1.50 per right provides the gross proceeds from the sale. --- **Step 3: Calculate the capital gain per right** - Capital gain per right = Sale price per right - Acquisition cost per right - = $1.50 - $0 - = $1.50 *Explanation:* Since the rights were obtained at no cost, the entire sale proceeds constitute the capital gain. There are no additional costs or taxes indicated, so the gain per right is straightforwardly $1.50. --- **Summary of calculation:** - **Acquisition cost:** $0 - **Sale price:** $1.50 - **Capital gain per right:** $1.50 **Conclusion:** The investor realizes a capital gain of $1.50 per right from selling the rights on the open market. 4. Analysis of why other Options are Incorrect: - **Option a. $0.00:** Incorrect because the rights were sold at $1.50 each, and there is no indication of any cost basis. If rights are received for free, the gain is simply the sale price; thus, it cannot be zero. - **Option b. $0.25:** Incorrect because there is no basis or cost indicated that would reduce the gain to $0.25. The calculation clearly shows a gain of $1.50. - **Option d. $1.75:** Incorrect because this exceeds the sale price of $1.50, which would imply a loss if the cost basis was zero or any value less than $1.75. The gain cannot be greater than the sale price when the initial cost is zero. **Summary:** Only option c, $1.50, accurately reflects the capital gain per right based on the given information, considering the rights were received for free and sold at $1.50 each. **Conclusion:** The correct answer is **c. $1.50**, representing the straightforward capital gain from selling the rights on the open market, given their assumed zero acquisition cost.