What is the Theoretical Value of a Right?
Let me explain the theoretical value of a right—it's essentially the value of a subscription right in a rights offering. From the moment a new rights offering is announced until three days before the subscription rights expire, which we call the cum rights period, this value is straightforward and calculable. To figure it out, you need the subscription price and how many rights are required to buy one share of stock. Here's the formula you use: (Stock Price - Rights subscription price per share) / (Number of rights required to buy one share + 1).
Key Takeaways on Theoretical Value
You can calculate the theoretical value of a right specifically during the cum rights period. As an investor with subscription rights, you're informed of the price to purchase shares, often at a discount to the current market price. You're also told how many rights you need to buy one share. With this data, the theoretical price becomes clear through the formula I mentioned.
Understanding Theoretical Value of a Right
The theoretical value of a right usually matches or closely resembles its market value—it's also referred to as the intrinsic value. During the cum rights period, shares with attached rights might trade differently from those without, so knowing this value is crucial for you as an investor.
Real-World Example of Theoretical Value of a Right
Take this example: suppose the current stock price is $40, the subscription price is $35, and you need four rights to purchase one share. The theoretical value comes out to ($40 - $35) / (4 + 1) = $1.
Now, about three days before expiration, we enter the ex-rights period—these are the final days to exercise rights, but it's too late for trades to settle with rights attached before the record date. Here, rights trade separately from the stock, and the value calculation changes. The formula becomes: (Stock price - Right subscription price) / Number of rights needed to buy a share.
Using the same example, if the stock price in the ex-rights period is $38, the value is ($38 - $35) / 4 = $0.75.
Rights are valued using parameters similar to options pricing, including the subscription price, interest rates, time to expiration, underlying stock price, and volatility. The key difference is that rights have much less time value due to their short lifespan compared to most options.
Theoretical Nil Paid Price
If you decide to sell your right directly in the market or let it lapse—which might involve a small administrative fee—you'll get the theoretical nil paid price. This is the difference between the subscription price you paid and the theoretical ex-right price. In our example, it's $40 - $38 = $2. That means you'd receive an amount that's twice the cum rights period value and more than the ex-rights period value for the right.
Other articles for you
White-collar jobs refer to office-based administrative or managerial roles that contrast with manual blue-collar labor and often involve higher education and pay.
The Nonaccrual Experience Method allows certain small service providers to exclude uncollectible revenues from accrual based on past experience.
A knuckle-buster is a manual device for imprinting credit card details onto paper forms, used before electronic terminals became common.
Inorganic growth involves expanding a company through mergers, acquisitions, or new locations rather than internal operations.
This page from Investopedia explores tech stocks as key economic indicators, featuring articles on major tech companies, investments, and industry definitions.
Non-recourse debt limits lenders to seizing collateral upon default, while recourse debt allows them to pursue borrowers for any remaining balance.
The Patti and Allan Herbert Business School at the University of Miami offers undergraduate and graduate business programs with a focus on international experiences and strong career outcomes.
Cost per click (CPC) is an online advertising model where you pay only when users click on your ads, helping drive targeted website traffic.
Exogenous growth theory explains that economic growth is driven by external factors like technological progress rather than internal economic forces.
Tax planning is about analyzing finances to minimize taxes through strategies like retirement contributions and gain-loss harvesting.