How to Calculate Theoretical Ex-Rights Price (TERP)

What is the Right Issue of Shares?

A right issue of shares (rights offering) is where a company provides an offer to their existing shareholders to purchase additional shares at a discounted price in a particular ratio proportionate to their existing shareholding. Shareholders have the option to purchase shares at a lower price on or before a specific date in order to keep their existing shareholding percentage (without dilution).

What is the Theoretical Ex-Rights Price (TERP) of a Share?

Usually, the share price will be changed after conducting the right issue. The new share price after the right issue is known as the theoretical ex-rights price (also known as ex-right price or TERP). It is calculated by sum the market value of existing shares and proceeds of right issues divided by the total number of shares after the right issue.

Formula to Calculate the Theoretical Ex-Rights Price (TERP)

Theoretical Ex-Rights Price (TERP) = [ Market Value of Shares Already Issued + Proceeds of New Right Issue ] / The Total number of Shares After Right Issue

Formula to Calculate Theoretical Ex-Rights Price (TERP)

What Happens to the Share Price after the Right Issue?

Usually, the share price will be decreased than the market price which was available before the right issue, but not less than the right issue subscription (discounted) share price.

Share Price Before Right Issue and After Right Issue

Value of a Right = Theoretical Ex-Rights Price – Right Issue Subscription (Discounted) Share Price

Why Companies conduct the Right Issue of Shares?

A rights issue is an additional capital-raising method for companies. A company can raise capital by providing the right for their existing shareholders to subscribe to newly issued shares in proportion to their existing holdings.

Learn more about Right Issue of Shares,

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