Theoretical Value (Of a Right)

Theoretical Value (of a Right)

The theoretical value of a right is the estimated intrinsic value of a subscription right issued in a rights offering. It helps investors understand the discount or premium of shares with attached rights during the offering period and guides decisions about exercising, selling, or letting rights lapse.

Key concepts

• Rights offering — existing shareholders receive rights allowing them to buy new shares at a specified subscription (exercise) price.
• Cum-rights period — the period after the rights offering is announced and before the rights detach (typically until a few days before expiration). During this period, shares trade “with rights” attached.
• Ex-rights (exercise) period — the period after rights detach and trade independently of the underlying shares.
• Nil-paid right — a right that has been issued but not yet paid for; it can often be sold in the market before exercising.

How to calculate the theoretical value

During the cum-rights period:
Theoretical value per right = (Stock price with rights attached − Subscription price) / (Number of rights required to buy one new share + 1)

During the ex-rights (exercise) period, when rights trade separately:
Theoretical value per right = (Stock price after rights detach − Subscription price) / Number of rights required to buy one new share

Rights can also be valued similar to options using factors such as the subscription price, interest rates, time to expiration, underlying stock price, and volatility. However, rights generally have much less time value than options because of their short lifespan.

Example

Assume:
* Stock price while trading with rights (cum-price) = $40
Subscription (exercise) price = $35
Number of rights required to buy one share = 4

Cum-rights theoretical value:
(40 − 35) / (4 + 1) = $1 per right

If the stock price after rights detach (ex-right price) is $38, the ex-rights theoretical value:
(38 − 35) / 4 = $0.75 per right

Theoretical nil-paid price

The theoretical nil-paid price is the difference between the cum-rights share price and the ex-rights share price:
Nil-paid price = Cum-rights share price − Ex-rights share price

Using the example:
Nil-paid price = 40 − 38 = $2

This represents the value captured by the rights between the cum- and ex-right prices; it can indicate what an investor might realize by selling rights in the market (less any fees or charges).

Practical takeaways

• Calculate theoretical right value during the cum-rights period to estimate the intrinsic value of a right and the effective discount when subscribing.
• Compare cum-rights and ex-rights values to decide whether to exercise, sell, or let rights lapse.
• Rights generally carry little time value compared with options because they expire quickly.
• The nil-paid price (cum minus ex) gives an indication of the total value associated with the rights as they detach from the share price.