The shares trade ex-rights date will be 29th December 2008 from 9am.
This is not exactly a good time to issue rights, as it sends mixed signals to the investors. Is DBS in dire need for cash that they need to issue rights to shore up capital? Has loans default rate increased?
If you are a DBS shareholder, will you be subscribing to the rights?
A) Buy another 1,000 DBS shares so that you can have 1,000 rights to purchase an additional 1,000 DBS shares @ $5,420 (you will end up with 3,000 DBS shares).
B) Buy 500 rights on the exchange so that you are entitled to buy 1,000 DBS shares @ $5,420 (you will end up with 2,000 DBS shares).
C) Sell away your 500 rights to people interested in purchasing DBS shares @ $5.42 (you will end up with slightly above $1,000 cash but your share in DBS will be diluted and price of DBS will fall more than $1 upon XR).
What will my option be? Very simple, I need to do some guess work and attempt to choose the most economical option. A simple calculation will be as below:
I am willing to purchase DBS in the open market for $8.80 to earn an additional 500 rights. Hence, at the end of the day, I will spend $8,800 (DBS shares) + $5,420 (subscribing to DBS rights shares)= $14,220 (which will end me up with 3,000 DBS shares).
If I were to purchase an additional 1,500 rights in the open market, how much will each right cost to justify my purchase?
By purchasing 1,500 rights, I will also end up with 3,000 DBS shares (including my 500 rights as well). Hence, I will need to spend $5,420 x 2 (to get 2,000 DBS rights shares issue) + cost of 1,500 rights= or lesser than $14,220. Hence each right will be worth buying if it costs less than (14,220-5,420 x 2)/1500 rights= $2.25
However, take note that rights can only be traded after DBS goes XR, or else it will be like trading derivatives.
Personally I might buy an additional DBS lot @ $8.80, sell away my rights above $2.30 and attempt to purchase DBS later @ $5 instead.