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. Rights Offering

    An issue of rights to a company's existing shareholders that ...
  2. Subscription Price

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

    A shareholder of record that qualifies for a rights offering ...
  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. Why would a company use a form of long-term debt to capitalize operations versus ...

    A firm that needs money for long-term, general business operations can raise capital through either equity or long-term debt. ... Read Full Answer >>
  2. Where can I find year-to-date (YTD) returns for benchmarks?

    Benchmarks are securities or groups of securities against which investment performance is analyzed. Examples of popular equity ... Read Full Answer >>
  3. Is a company's paid in capital affected by the trading of its shares in the secondary ...

    The amount of paid-in capital a company has is not affected by the trading of its shares on the secondary market. Paid-in ... Read Full Answer >>
  4. What are financial risk ratios and how are they used to measure risk?

    Some of the financial ratios that are most commonly used by investors and analysts to assess a company's financial risk level ... Read Full Answer >>
  5. Does the profit or loss of a company affect its paid in capital?

    The profits or losses of a company do not affect its paid-in capital. Paid-in capital is generated solely by the sale of ... Read Full Answer >>
  6. How do companies use the equity multiplier to determine a financing strategy?

    Like the debt-to-equity (D/E) ratio, the equity multiplier is used in business finance to determine whether a company carries ... 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. Stock Analysis

    Top Investment Ideas for Malls of the Future

    How investors should be thinking about the mall of tomorrow.
  6. Stock Analysis

    Do Data Breaches Really Matter for Retailers?

    Do data breaches hurt the stock price of retailers? Let's have a look at a few examples.
  7. Stock Analysis

    Whole Foods Pricing: Mistake or Misdeed?

    Whole Foods Market might soon find itself in the middle of a public relations nightmare. But will its share price suffer?
  8. Professionals

    Indexing vs. Stock Picking: Which is Better Now?

    Indexing and stock picking both have positive and negative features. One has outperformed the other historically, but which is the better option right now?
  9. Stock Analysis

    Whole Foods: How Will Shares React to Price Probe?

    Why it's important to look beyond the recent headlines about Whole Foods Market and accusations of pricing problems in New York.
  10. Stock Analysis

    What's Worth More: Walmart or Facebook?

    Which company is worth more, Walmart or Facebook? The answer may come as a surprise.

You May Also Like

Hot Definitions
  1. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  2. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  3. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  4. Current Account Deficit

    A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services ...
  5. International Monetary Fund - IMF

    An international organization created for the purpose of: 1. Promoting global monetary and exchange stability. 2. Facilitating ...
  6. Risk-Return Tradeoff

    The principle that potential return rises with an increase in risk. Low levels of uncertainty (low-risk) are associated with ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!