The theoretical price of rights issue shares is the share price that is considered reasonable after the issuance of new shares with a certain amount and a certain price. Determination of the price of a stock is determined by the amount of demand and supply. When the number of requests for a stock is higher than the number of offers, the stock price tends to increase and vice versa when the number of shares offered is greater than the number of requests, the stock price tends to fall.
Sometimes an issuer decides to grow the company bigger and requires additional funding. For this reason, various things were carried out, one of which was issuing a certain number of new shares. The previous shareholders, of course, wanted to maintain their share ownership, therefore they received a special right called a right issue or in american it is often referred to as HMETD (Preemptive Rights) at a certain price.
In the process, a term called the theoretical right issue price appears to determine the fair price of a stock that has been completed through the rights issue process. The value can be found using the formula below.
Theoretical price of right issue = ((last price cum date x number of old shares) + (redemption price x number of new shares)) / (number of old shares + number of new shares)
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For example, an issuer with code XXXX plans to issue additional shares and issue rights to existing shareholders with a ratio of 10,000 to 3,000. The share price on cum date is USD 750 per share, while the redemption price for additional shares is USD 500 per share. Then we can calculate the theoretical share price after the pre-emptive rights or rights issue process is held.
The theoretical price of the right issue = (($ 750 x 10,000) + ($ 500 x 3,000)) / (10,000 + 3,000) = $ 692
Beginner stock traders are often surprised when they find out that XXXX’s stock price plunged quite deep from the beginning in the range of $750 to $692. However, this is a natural thing because there has been a change in the number of share offerings and the price of newly issued shares tends to be cheaper than the price. market. Therefore, be prepared to welcome the decline in stock prices after the rights issue process is completed.
The purpose of calculating the theoretical share price
* Knowing the fair price after the rights issue
After a few hours or even a few days, we often see the condition of stock prices that have just gone through a rights issue above or below the theoretical price. If the latest market price is above the theoretical price, it means that the number of requests for shares is higher than the number of offers. However, when the latest market price after the rights issue is below the theoretical price, it means that the number of requests is smaller than the number of offers.
* Material for fundamental analysis
From a fair price will help traders in making decisions to buy shares or not. For example, using the previous example, it is known that the theoretical price of XXXX shares after the rights issue is at Rp. 692. If a few days later there is an increase in the price to Rp. 710, rational traders will certainly postpone their plans to buy XXXX shares. But if the scenario is the other way around where the stock price is at Rp 685, a rational trader can decide to buy XXXX stock because it is below the theoretical price and has the potential to strengthen towards the theoretical price.
Notes:
The theoretical price of the rights issue does not apply if the financial performance has changed. Every quarter or even every year each issuer will issue a financial report that shows performance over a certain period of time. If the company’s financial performance is encouraging, the fair price of the shares should ideally be higher than the theoretical price of the last rights issue. However, if the condition is reversed where the company’s financial performance deteriorates, the fair price of the shares tends to be lower than the theoretical price of the latest rights issue.
The right issue is also known as the Pre-emptive Rights (HMETD) which is prioritized for existing shareholders in a company. Simply put, a company that has issued shares before, must have had many investors, both individuals and institutions. When a company wants to increase its capital to support its business growth, one method that can be done other than taking a loan is to re-issue new shares. Now, investors who are current shareholders of the company, will have the right and priority to get the new shares, before the shares are offered to new investors. These rights and priorities are called rights issues.
What is the purpose of the Rights Issue?
The purpose of the company issuing new shares in the form of a right issue is of course to obtain additional capital in the form of fresh funds from its shareholders, which may be used by the company to:
Business Expansion
To increase the company’s competitiveness both domestically and internationally, as well as to increase company profits, of course, business expansion must be carried out. Several business expansions are commonly carried out by companies such as the formation of new markets, addition and expansion of facilities, as well as the recruitment of new employees who are more competent in their fields. All of this, of course, requires a lot of working capital.
Acquisition of other companies
Company acquisition is the act of buying part or all of the shares of another company. Usually this is done by large companies to small companies with good growth prospects. To acquire the company, of course, the company needs capital to buy the shares of the company to be acquired.
Paying company debt
Business debt is not a bad thing, but to improve the company’s image in the eyes of investors, the public, and the government, of course the existing debt must be paid or repaid before the due date or on time. With the issuance of this rights issue, the company can use the proceeds from the sale of its new shares to cover existing debts.
