Especially given the large number of rights issues currently popping up in our markets, I thought it would make sense to explain how to value a right.

Firstly, a right is often used by a listed company to raise needed funds while prevent shareholder interests being dilute.  The option (or "right") to buy more shares in the company for cash is issed to existing shareholders per a predetermined ratio per share held.

Now, lets look at a practical example:

Myriad Medical ("MYD") is currently aiming to raise R100 million through a rights issue to existing shareholders.  The rights to acquire further shares in Myriad have been issued by the company at a ratio of 0.7916 per share and at a subscription price of 80c per share.

Thus, a Myriad shareholder with 100 MYD shares will get 79.16 (rounded down) rights that can be converted into shares if s/he is willing to pay 80c per right / share.

These rights are renounceable (i.e. can be sold or given to anybody) and expire on a specific day in about a months time.

As these rights are renounceable, the JSE has actually listed them and does so by placing an "N" at the end of the share code: "MYDN".  This opens up the market to non-shareholders to acquire MYD shares at 80c.

The interesting fact is that MYD shares closed at 88c at the end of last week.

So, what are the rights worth?

If you can buy a right on the market to acquire MYD shares at 80c and then resell the share directly into the market at 88c, you are making a 8c profit.  Thus--unless this arbitrage opportunity is allowed to exist--the rights should trade at around 8c.

But, bear in mind that the rights can only be excersised in one months time (mid-April), thus you cannot immediately make the 8c profit. Because of this you need to present value the profit and (rounding down) would mean that the right is actually worth around 7c. 

Also, the right's value should rise with the discount rate towards 8c (assuming the MYD share price stays constant at 88c) at it gets nearer to the excersise date.

Please bear in mind that this is an extremely basic example and ignores various other complications, like the fact that Myriad's rights issue is underwritten by its major shareholders and its funds earmarked to settling a major acquisition that fundamentally changes the Group.  It also ignores any anticipated ex-rights share price drop due to  dilution from the added equity and how this would change the value of the right.

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