Why is the denominator of formula for the cum-right value of a right “Rights needed per new share + 1”? Why do we add 1?

Hi @Mass_coffee_louse - great question. The +1 accounts for the difference in value when the shares go “ex-rights” (start trading without rights). Similar to how it works with a cash dividend, the shares fall in value the day rights are no longer attached to the shares. The calculation makes it an even playing field given the share value will adjust.

I hope this makes sense. I wouldn’t worry too much about the reasoning, as the test is unlikely to focus on “the why.” If you know the two formulas, I’m confident you’re more than adequately prepared.

Is the formula always +1 though or does it depend on the actual dividend, share price and how many rights are required to buy a share? If only one right is required, that would mean that the cum-right value formula would give us half the right value of the ex-right formula. Wouldn’t it be more accurate to subtract the dividend from the numerator of the fraction instead?

Also, a related question: do we use the ex-right formula only on the ex-date itself, or also for some time after the ex-date. And if after, for how long after?

The cum-rights formula is always +1, no matter what. The number of rights needed to buy a new share taken into consideration in the formula (it’s the other part of the denominator). Keep it simple - add 1 to the denominator if the stock trades with the rights, and don’t add 1 if it trades ex-rights.

The ex-rights formula is used starting the ex-date. No wait time needed.

Is the ex-rights formula used only on the ex-date itself or also for some time after?

Like say the ex-date is May 20, what formula would be used on the 21st?

The ex-rights formula is used starting the ex-date and applies every day after. In your example, ex-rights applies on May 20th, 21st, and every day after (until the rights expire).

I’m a bit confused because if the next ex-date is August 20, why is May 21 not considered before the ex-date? When do we start considering dates before the August 20 ex-date to be cum-rights?

Now I’m a bit confused - where did August come from? I thought we were discussing May.

Sorry, should have ben more clear. I was giving an example of the ex-date of the next quarterly dividend

The ex-rights date has nothing to do with dividends. Dividend distributions and rights distributions are completely separate. Not sure if this helps?

Ah, I thought they were lol

Thanks