Canadian Securities Course (CSC) Level 1 Practice Exam 2026 - Free CSC Level 1 Practice Questions and Study Guide

The formula for the intrinsic value (IV) of a right during the ex-rights period is derived from the financial principles surrounding rights offerings. In a rights offering, existing shareholders are given the opportunity to purchase additional shares at a specified subscription price, typically lower than the current market price.

The intrinsic value of a right essentially reflects its potential benefit to the shareholder: the difference between the current market price of the stock and the subscription price, adjusted for how many rights are required to purchase one new share.

So, using the formula where you subtract the subscription price from the stock price and divide that result by the number of rights required to buy one share effectively allows us to quantify the financial benefit of exercising the right. This indicates how much value an individual right holds.

This approach properly accounts for the relationship between the market price, the price at which shares can be purchased through rights, and the supply of rights that enables the new shares to be acquired. It highlights the mechanics of rights offerings as a means of raising capital while offering value to existing shareholders.

In contrast, the other choices involve incorrect calculations or improper interpretations of the rights' value and do not align with the traditional method of evaluating options in the context of rights offerings.