Rights issue

[pao]

Hi,
I am testing the FM and have a question:
How you treat rights issue?
1) when you sale the rights;
2) when you use the rights to get the new shares;
3) when you buy rights (in addition to the allocated ones).

I assume "Distributions" should be used but I cannot figure out exactly how.
If I created a new investment for the rights, how should the link with the stock be made.

[Mark]

Hi pao,

By "rights" do you mean "options"? As in the option to purchase a stock at a certain price? If so, we have tips on tracking options here:

http://www.fundmanagersoftware.com/options.html

[pao]

Thanks for the prompt reply, Mark.

Under a secondary market offering of shares to raise money, a company can opt for a rights issue to raise capital. With the issued rights, existing shareholders have the privilege to buy a specified number of new shares from the firm at a specified price within a specified time.

Maybe we can consider this some sort of a call option (with option price = 0 and number of options proportionate to the number of shares owned).
But maybe we should also record a split as new shares are released and the historical prices need to be adjusted.

Moreover if the rights were sold then I assume the proceeds from this sale should increase the total return of the underlying stock. If we used the option (thus treating this as a separate investment) we would not link the above mentioned proceeds to the total return of the stock.

[Mark]

Hi pao,

It sounds like this 'right' should be tracked as a separate investment (like an option). How about recording it like this:

When the company issues this right, record a distributed distribution for the market value of the right. Record a purchase of a new investment to track this right, for the same value as the distributed distribution. Depending on what you end up doing with this right would determine how you record its closing, and would be the same as closing a call option:

http://www.fundmanagersoftware.com/buycall.html

I'm understanding that this right has its own price, and can be traded, just like an option, correct?