Theoretical Value (Of A Right)

AAA

DEFINITION of 'Theoretical Value (Of A Right)'

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.

INVESTOPEDIA EXPLAINS '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. Cum Rights

    A shareholder of record that qualifies for a rights offering ...
  2. Subscription Price

    1. A static price at which existing shareholders can participate ...
  3. Rights Offering

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

    The market price that a stock will theoretically have following ...
  5. Rights

    A security giving stockholders entitlement to purchase new shares ...
  6. Ex-Rights

    Shares of stock that are trading but no longer have rights attached ...
RELATED FAQS
  1. How does debt-to-capital change when a company issues new shares of stock?

    The debt to capital of a company changes when it issues new shares of stock by decreasing its amount of total debt in relation ... Read Full Answer >>
  2. How does additional equity financing affect existing shareholders?

    Additional equity financing dilutes existing shareholders. There are two types of candidates for equity financing. One is ... Read Full Answer >>
  3. Do stock splits and stock dividends affect stockholder equity?

    Stockholders' equity represents the capital portion of a company's balance sheet. The stockholders' equity can be calculated ... Read Full Answer >>
  4. What are the benefits for a company using equity financing vs. debt financing?

    Most companies use a combination of debt and equity financing, but there are some distinct advantages of equity financing ... Read Full Answer >>
  5. What companies will typically exercise buybacks, and why do they do it?

    In stock market terminology, a stock buyback refers to the repurchasing of shares of stock by the company that issued them. ... Read Full Answer >>
  6. Which is better: A high or low equity multiplier?

    An equity multiplier measures a company's financial leverage by using a ratio of the company's total assets to its stockholders' ... Read Full Answer >>
Related Articles
  1. Bonds & Fixed Income

    Introduction To Convertible Preferred Shares

    These securities offer an answer for investors who want the profit potential of stocks but not the risk.
  2. Investing Basics

    Knowing Your Rights As A Shareholder

    We delve into common stock owners' privileges and how to be vigilant in monitoring a company.
  3. Investing Basics

    What Owning A Stock Actually Means

    Think owning a stock gives you special privileges with the company? Think again.
  4. Options & Futures

    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.
  5. Investing Basics

    What are Ordinary Shares?

    Ordinary shares are any type of shares that are not preferred and don’t pay any type of predetermined dividend amount.
  6. Charts & Patterns

    How to Analyze Pharma Stock Fundamentals

    What you need to know about analyzing the fundamentals of pharma stocks.
  7. Trading Strategies

    How to Pick the Best Dividend Stocks

    Dividend stocks can make you rich, but you have to be patient.
  8. Options & Futures

    5 Gold Stocks that Pay Regular Dividends

    Five dividend paying gold stocks to put on your watch list.
  9. Stock Analysis

    4 Top Dividend-Paying Agriculture Stocks

    Here are four different ways to play dividend-paying agro stocks.
  10. Chart Advisor

    Long and Short Trades to Consider This Week

    Here are short and long trades to consider, so you have choices no matter which way the market goes.

You May Also Like

Hot Definitions
  1. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  2. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  3. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  4. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  5. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
Trading Center