# Calculate Theoretical Value of a Right with This Simple Formula

![Theoretical Value (Of A Right)](https://www.investopedia.com/thmb/demqBRJYCbBBdiATKcrRppoOd90=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Theoretical-value-of-a-right_final-e7bfe15b0a4b4be7adc0d8a1407a89fa.png)

*— Investopedia / Michela Buttignol*

## What is the Theoretical Value (Of A Right)?

The theoretical value of a right refers to the value of a [subscription right](https://www.investopedia.com/terms/s/subscription_right.asp). That value can differ from the price of a share without rights attached so it's useful for investors to know. After a [rights offering](https://www.investopedia.com/terms/r/rightsoffering.asp) is announced and until three days before the subscription rights expire (the [cum rights](https://www.investopedia.com/terms/c/cumrights.asp) period), you can establish the value of the right easily. To do so, insert the share price, the subscription price, and the number of rights required to buy one share of stock into the following calculation:

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

### Key Takeaways

*   The theoretical value of a right is computed during the cum rights period, and is important to understanding the value of an investment during a rights offering.
*   To calculate the theoretical value of a right, you need to know the stock price, the subscription price, and how many rights are needed to purchase one share.
*   Investors may benefit from purchasing shares at a discount during the rights offering, and understanding the theoretical value can aid in making informed financial decisions.
*   Rights have less time value compared to options due to their shorter lifespan, which affects their valuation.
*   The theoretical nil paid price represents the value an investor receives if they sell their rights or let them lapse; it's calculated as the difference between the subscription price and the ex-right price.

## Delving into the Theoretical Value of a Right

The theoretical value of a right and the [market value](https://www.investopedia.com/terms/m/marketvalue.asp) of a right are generally the same or very similar. This is also called the [intrinsic value](https://www.investopedia.com/terms/i/intrinsicvalue.asp) of the right. Since the price of shares with attached rights might differ from that for regular shares during the cum rights period, investors want to know this value.

## Practical Example: Calculating the Theoretical Value of a Right

As an example, the current price of a stock is $40, the [exercise price](https://www.investopedia.com/terms/e/exerciseprice.asp) (or subscription price) is $35 and four rights are required to purchase a share. The theoretical value of the right is:

($40 - $35) / (4 + 1) = $1.

The period of time about three days before expiration is referred to as the exercise of rights period. This is the last chance to exercise rights, but too early to buy new shares with rights because the trade would settle before the record date, when rights expire. The theoretical value during the exercise of rights period—when rights trade independently of the stock—differs 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 needed to buy a share.

Continuing from the above example, the stock price during the ex-rights period is $38, the theoretical value of the right during the exercise rights period would be ($38 - $35) / 4 = $0.75.

A right's value is calculated like options, using the right's subscription price, interest rates, time until expiration, and the underlying stock's price, given its [volatility](https://www.investopedia.com/terms/v/volatility.asp). The major difference is that rights have significantly less [time value](https://www.investopedia.com/terms/t/timevalue.asp) than most options because of their comparatively short lifespan.

## Calculating the Theoretical Nil Paid Price

If an investor chooses to sell their right in the market, or if they choose to let the right lapse, which may result in a minimal administrative charge, they will receive the theoretical nil paid price of the right. This value is calculated by determining the difference between the subscription price the investor paid and the theoretical ex-right price.

Considering the example used above, the calculation for a theoretical nil paid price looks like this: $40 - $38 = $2. Thus, the amount the investor would receive for the right is twice the value of the right during the cum rights period and even greater than the value of the right during the ex-rights period.

## The Bottom Line

The theoretical value of a right refers to how much a share of stock is worth before it starts trading. Investors may wish to know the discounted value associated with a subscription right to shares in order to size up the profit they could make if they subsequently sell their shares on the open market.