First Microfinance Development Banks’s right value is Rs. 418.5

ShareSansar, January 8:

Nepalese capital market is witnessing various changes. Various companies IPO, Right share and implementation of Demat are hitting current market in this cold weather. Right share is one of the ways to pool capital by companies or financing. But the knowledge and practice of right share is very little among investors.

Right share is nothing but the firm sell common stock to its existing stockholder. Under rights issue, each stockholder is issued an option to buy a certain number of the shares. The terms
and conditions of the rights offering are stated in a piece of paper called a right. In right offering, each stockholder receives one right for each share of stock owned. The practice of right is not new. Rights are traded in stock in well developed capital market. But in Nepalese stock it is still not mandatory to trade right through NEPSE. There are various issue of right in the market.

There are various right offering on pipe line. First Microfinance, Sana kisan, Prabhu Bank, Sunrise Bank are few companies which have approved right offering through their AGM. Recently First Microfinance has got Grade 3 assigned by ICRA. First microfinance development bank has a paid up capital of NPR 100 million. In the quarter end of 2070/71 the company has earned net profit of Rs 25.61 million from Rs 17.15 million on last quarter end. The EPS of First Microfinance has stands at Rs 25.61 and Net worth per share of Rs. 133.83. The company is looking for raising Rs 100 million through 1:1 right offering. In context of Nepal it is good news to shareholders who will exercise their right or sell their right. But what happen to those shareholders who have no sufficient fund to exercise the right.

Theoretical values of right of Microfinance Development Bank

This is a common question of shareholder. Talking about the theoretical value of right of First Microfinance is approximately Rs. 418.5.

Calculation of right value

Market price per share (closing price on 1st jan 2015) = Rs. 937

Subscription Price= Rs 100
Right= 1:1

Solution:

Value of right = (Market price per share – Subscription Price)/(Number of right +1)

=(937-100)/(1+1)

= Rs. 418.5

Effect on market price of a share
The market price of the share will decrease by the value of right after right offering. In this case the adjusted price of the stock will be Rs. 518.5 (937-418.5) after right offering.

Effect on the position of stockholder
When the rights are offered by the company, stockholders will have the choice of either exercising their rights or selling them. If they have sufficient fund and want to increase their share holdings, they will exercise the rights. On the other hand, if they do not have sufficient fund they can sell the right. Theoretically it is believe that in either case the effect on the position of the stockholder will remain same. But if the holder do not exercise or sell the right they will face a loss of the values of right.

Sagun Prajapati, Uniglobe College, MBA (Finance)