Determining The Value of a Right Cum Rights

In order to determine the value of one right before the ex rights date, you must use the cum rights formula. Subtract the subscription price of the right from the market price of the stock. Once the discount (if any) has been determined, divide the discount by the number of rights required to purchase one share plus one. This will determine the value of one right.

Example:

XYZ has 10,000,000 shares of common stock outstanding and is issuing 5,000,000 additional common shares through a rights offering. XYZ is trading in the market place at

$51 per share and the rights have a subscription price of $48 per share. Keep in mind that the stock price reflects the value of the right that is still attached to the stock.

The value of a right is determined as follows:

Stock Price

- Subscription Price

The number of rights required to purchase one share + 1

$51

-$48

$ 3

$3/3 rights = $1

Because each one of the 10,000,000 shares is entitled to receive one right and the company is offering 5,000,000 additional shares, it will require $48, plus two rights, to subscribe to one additional share. The rights agent will handle the name changes when the rights are purchased and sold in the market place.

Determining The Value of a Right Ex Rights

In order to determine the value of one right after the ex rights date, subtract the subscription price of the right from the market price of the stock. Once the discount (if any) has been determined, divide the discount by the number of rights required to purchase one share. This will determine the value of one right. The price of the stock on the ex rights date is adjusted down by the value of the right to reflect the fact that purchasers of the stock will no longer receive the rights.

Example:

XYZ has 10,000,000 shares of common stock outstanding and is issuing 5,000,000 additional common shares through a rights offering. XYZ is trading in the market place at

$50 per share and the rights have a subscription price of $48 per share. The value of a right is determined as follows:

Stock Price

- Subscription price

The number of rights required to purchase one share

$50

-$48

$2

$2/2 rights = $1

Because each one of the 10,000,000 shares is entitled to receive one right and the company is offering 5,000,000 additional shares it will require $48, plus two rights, to subscribe to one additional share.

Series 62 Sample Questions

Voting

Related Articles
  1. Investing

    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. Investing

    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. Managing Wealth

    Knowing Your Rights As A Shareholder

    We delve into common stock owners' privileges and how to be vigilant in monitoring a company.
  4. 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.
  5. Investing

    How Property Rights Affect Economies

    Property rights are laws governments create that enable investors to control, benefit from, and transfer property.
  6. 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.
  7. Investing

    What is a Preemptive Right?

    A preemptive right allows select shareholders to buy newly issued shares in their corporation before the general public.
  8. Investing

    What's A Company’s Worth, And Who Determines Its Stock Price?

    A company’s worth is the same as its market capitalization. Market capitalization is stock price multiplied by number of outstanding shares.
  9. Managing Wealth

    Knowing Your Rights As A Shareholder

    Common shareholders typically enjoy six main rights.
Frequently Asked Questions
  1. What's considered to be a good debt-to-income (DTI) ratio?

    Your debt-to-income ratio helps lenders determine your credit worthiness. Find out how to calculate your score and how to ...
  2. What is the difference between a loan and a line of credit?

    Learn to differentiate between lines of credit and standard loans, and determine when you are likely to use each method of ...
  3. What does a Chief Financial Officer (CFO) do?

    A CFO is responsible for accurate reporting of a company's financial information, investing the company's money and identifying ...
  4. How did George Soros break the Bank of England?

    George Soros pocketed $1 billion by betting against the British pound, cementing his reputation as the premier currency speculator ...
Trading Center