# How to calculate value of a right

In a rights offering, the subscription price at which each share may be offered is generally at a discount to the current market price

A rights offering is when a company issues to its existing shareholders a right to buy additional shares in the company. The company offers its shareholder a specific number of shares at a special price.

The company will also set a time limit for the shareholder to buy these shares. The shares are often offered at a discounted price to the existing shareholders.

In a rights offering, the subscription price at which each share may be offered is generally at a discount to the current market price. Rights are often transferable, allowing the holder to sell them in the open market.

Value of a right

For instance: A company has decided to increase its existing share capital by making rights issue to its existing shareholders. The company is offering one new share for every two shares held by the shareholder. The market value of the share is Rs. 240 and the company is offering one share of Rs. 120 each.

Price of rights shares

 Market value of the shares already held by shareholder (Rs. 240 x 2 shares) Rs. 480 Add: Price to be paid for buying one share Rs. 120 Total shares (3 shares) Rs. 600

Average price of one share: Rs. 600 / 3 = Rs. 200
Value of the right = Market value – Average price
Rs. 240 – Rs. 200
Value of right = Rs. 40

A company may offer rights shares to its shareholders to raise extra funds to pay off its debts or to fund its expansion plan, etc.

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