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5.7 Valuation of rights issues

Valuation of rights issues involves determining the value of the rights being offered to existing shareholders by a company. Here’s an overview of how rights issues are typically valued:

  1. Theoretical Ex-Rights Price (TERP) Method: The TERP method is commonly used to value rights issues. It calculates the theoretical ex-rights price, which is the expected price of the company’s ordinary shares after the rights issue. The valuation process involves the following steps: a. Determine the current market price of the company’s ordinary shares. b. Determine the number of new shares that will be issued to existing shareholders through the rights issue and the subscription price per share. c. Calculate the value of the rights by subtracting the subscription price from the current market price. d. Determine the ratio of rights shares to existing shares to calculate the entitlement ratio. e. Calculate the theoretical ex-rights price by adjusting the current market price for the value of the rights and the entitlement ratio.
  2. Relative Valuation Method: The relative valuation method compares the subscription price of the rights issue to the prevailing market price of the company’s ordinary shares. It assesses the discount or premium offered to existing shareholders through the rights issue. This method considers the market sentiment and pricing dynamics of the company’s shares in relation to the rights issue.
  3. Net Asset Value (NAV) Method: The NAV method involves assessing the net asset value of the company and determining the impact of the rights issue on the shareholders’ equity. The valuation considers the additional equity contributed by the rights issue and how it affects the overall net asset value per share.
  4. Discounted Cash Flow (DCF) Method: The DCF method involves estimating the future cash flows of the company and discounting them to their present value. The valuation considers the cash flows generated by the additional capital raised through the rights issue and the impact on the overall value per share.

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