Theoretical Value (Of A Right)

What is 'Theoretical Value (Of A Right)'

Theoretical value (of a right) is the calculated value of a subscription right. The theoretical value of a right during the cum rights period - which is the interval after the announcement of the rights offering but before the stock trades on an ex-rights basis - is calculated by the formula:

(Stock Price - Rights subscription price per share) / # of rights required to buy one share + 1

The market value of a right is usually quite close to its theoretical value. Also known as intrinsic value of a right.

BREAKING DOWN 'Theoretical Value (Of A Right)'

For example, if the current stock price is $20, the subscription or exercise price is $15, and 4 rights are required to buy one share, the theoretical value of a right would be:

($20 - $15) / (4 + 1) = $1.

The theoretical value during the ex-rights period, when the rights are detached from the stock and trade on an independent basis, is slightly different than the value during the cum rights period. The formula in this case is:

(Stock Price - Rights subscription price per share) / # of rights required to buy one share).

Continuing with the above example, if the stock price in the ex-rights period is now $19.40, the theoretical value of a right would be:

($19.40 - $15) / (4) = $1.10.

The value of a right is determined by the same parameters that are used for pricing options, including the price of the underlying stock and its volatility, the rights subscription price, present interest rates, and time to expiration. A key difference is that unlike longer-dated options, rights have very little time value because of their relatively short lifespan.

RELATED TERMS
  1. Rights

    A security giving stockholders entitlement to purchase new shares ...
  2. Theoretical Ex-Rights Price

    The market price that a stock will theoretically have following ...
  3. Subscription Right

    The right of existing shareholders in a company to retain an ...
  4. Cum Rights

    A shareholder of record that qualifies for a rights offering ...
  5. Rights Offering

    An issue of rights to a company's existing shareholders that ...
  6. Ex-Rights

    Shares of stock that are trading but no longer have rights attached ...
Related Articles
  1. Markets

    Understanding Rights Issues

    Not sure what to do if a company invites you to buy more shares at discount? Here are some of your options.
  2. Managing Wealth

    Investing In Stock Rights And Warrants

    Many companies choose to issue rights or warrants as an alternative means of generating capital to avoid dilution of existing share value.
  3. Investing

    Stock Rights Issue

    Rights are offers that allow existing stockholders to buy additional shares at a predetermined price, for a set time period. Usually, the number of shares the investor can purchase are in proportion ...
  4. Investing

    Explaining Rights Offering

    A rights offering is an offer by a company to its existing shareholders of the right to buy additional shares in proportion to the number they already own.
  5. Personal Finance

    Just the Right Book Review: Is It Worth It?

    Take an in-depth look at Just the Right Book, a subscription service that delivers personalized book selections based on your reading history and preferences.
  6. Investing

    What is Right of First Refusal?

    The right of first refusal is a contract in which a seller grants another party the right to enter into a business transaction before anyone else.
  7. ETFs & Mutual Funds

    Value Investing Strategies in a Volatile Market

    Volatile markets are a scary time for uneducated investors, but value investors use volatile periods as an opportunity to buy stocks at a discount.
  8. Investing

    What Is The Value In Value Investing?

    Value investing has its advantages, but it also has significant drawbacks. We look at the pros and cons.
  9. Investing

    Knowing Your Rights As A Shareholder

    We delve into common stock owners' privileges and how to be vigilant in monitoring a company.
  10. Markets

    Getting A Handle On The Options Premium

    The price of an option, otherwise known as the premium, has two basic components: the intrinsic value and the time value. Understanding these factors better can help the trader discern which ...
RELATED FAQS
  1. How are rights distributed in a rights offering?

    Learn about stock rights offerings that companies may make, and discover how the rights are distributed among the company's ... Read Answer >>
  2. What is a direct rights offering?

    Discover what a direct rights offering is, what it means for shareholders who receive the offering, and the reasons a company ... Read Answer >>
  3. Why would a company issue a rights offering?

    Understand more about a rights offering, and learn the most common reasons a company might have to issue a rights offering, ... Read Answer >>
  4. What rights do all common shareholders have?

    Learn what rights all common shareholders have, and understand the remedies that can be taken if those rights are violated ... Read Answer >>
  5. What is the difference between real estate and real property?

    Understand how real estate is legally different from real property and the implications of that difference for each property ... Read Answer >>
  6. What is the difference between share purchase rights and options?

    Discover the difference between share purchase rights and options, which are essential to understand when deciding to invest ... Read Answer >>
Hot Definitions
  1. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  2. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  3. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  4. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  5. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  6. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
Trading Center