Hypothetical Value (Of A Right)
What is the Theoretical Value (Of A Right)?
The hypothetical value (of a right) is the value of a subscription right. During the period of time when a new rights offering is announced up until three days before the subscription rights expire (known as the cum rights period), the value of the right is specific and can undoubtedly be calculated. To work out the value of a right during the window in which it is effective, and investor must be informed the subscription price and the number of rights required to buy one share of stock. With that data the value of the right can be calculated utilizing the accompanying formula:
(Stock Price - Rights subscription price per share)/(Number of rights required to buy one share + 1)
Figuring out Theoretical Value (Of A Right)
The hypothetical value of a right and the market value of a right are generally something similar or basically the same. It is otherwise called the intrinsic value of the right. Since the value of stock shares that have rights appended to them during the cum rights period might vary from ordinary shares without such rights, investors need to know this hypothetical value.
True Example of Theoretical Value of a Right
As an example, the current price of a stock is $40, the exercise price (or subscription price) is $35 and four rights are required to purchase a share. The hypothetical value of the right is:
($40 - $35)/(4 + 1) = $1.
The period of time around three days before expiration is alluded to as the exercise of rights period. These are the last days to exercise rights, yet a period too soon to purchase new shares with rights, since the trade will settle before the record date, the day the rights expire. The hypothetical value during the exercise of rights period — when rights trade freely of the stock — varies from the value during the cum rights period.
The calculation for the value during the exercise of rights period is:
(Stock price - Right subscription price)/Number of rights expected to buy a share.
Continuing from the above example, the stock price during the ex-rights period is $38, the hypothetical value of the right during the exercise rights period would be ($38 - $35)/4 = $0.75.
A right's value is calculated utilizing similar boundaries utilized for pricing options, including the rights subscription price, winning interest rates, time to expiration, and the share price of the underlying stock, thinking about the level of its volatility. The major difference is that rights have altogether less time value than most options in view of their nearly short life expectancy.
Hypothetical Nil Paid Price
In the event that an investor decides to sell their right outright in the market, or on the other hand assuming that they decide to let the right lapse, which might bring about a negligible administrative charge, they will receive the hypothetical nothing paid price of the right. This value is calculated by deciding the difference between the subscription price the investor paid and the hypothetical ex-right price.
Taking into account the example utilized over, the calculation for a hypothetical nothing paid price seems to be this: $40 - $38 = $2. In this manner, the amount the investor would receive for the right is two times the value of the right during the cum rights period and, surprisingly, greater than the value of the right during the ex-rights period.
Features
- These equivalent investors are informed the number of rights that are important to purchase one share of stock.
- From this data the hypothetical price can be calculated.
- Investors with subscription rights are informed the price for which they can purchase the shares — for the most part at a discount to current market price.
- The hypothetical value of a right can be calculated during the cum rights period.
