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This post is a continuation of the previous post discussing rights issues.

Before we go into some mathematical aspects of rights issues, it is good to go through a couple of terms that we commonly see.

Renounceable – A renounceable rights issue allows for shareholders to sell away their rights. A non-renounceable rights, on the other hand, cannot be sold.

Underwritten – A rights issue that is underwritten ensures that all the required funds are received regardless of the number of subscriptions by the shareholders. The underwriter will have to subscribe to any leftover rights. In return for this risk, a fee has to be paid to the underwriter. In cases where an underwriter cannot be found, it is common to get a majority shareholder to agree to subscribe to the excess rights. Another way is to allow for all shareholders to subscribe to the excess rights.

Now, let us go on to some maths using the recent DBS rights issue as an example. Letters in parenthesis will be used to show a general formula. :)

Last traded price (before announcement of rights) : $9.85 (M)

Theoretical ex-rights share price: $8.37 (X)

Subscription price: $5.42 (S)

1 rights given for every 2 (N) shares owned

To make things simpler, let’s consider an investor John who owns 2000 shares of DBS bought at a price of $9.85.

After the ex-rights date, he owns 1000 rights which he duly uses to subscribe to DBS shares.

All in all, his total outlay for his DBS shares is 2000×9.85+1000×5.42=$25120

Therefore, his weighted average cost per share becomes 25102/3=$8.37 which is actually the theoretical ex-rights share price.

A rights issue is not supposed to create or reduce shareholder’s wealth, so it makes sense that the value of the DBS shares to an investor is the same after the ex-rights date. Read more…