Theoretical Ex-Rights Price (TERP)

Theoretical Ex-Rights Price (TERP)

A theoretical ex-rights price (TERP) is the estimated market price of a share immediately after a company completes a rights offering. Rights offerings allow existing shareholders to buy additional shares, typically at a discount, increasing the number of shares outstanding and causing dilution. TERP expresses the new share value after taking the issue price and increased share count into account.

Key takeaways

• TERP estimates the share price after a rights offering; it is usually lower than the pre-offering price because of dilution.
• Rights offerings give current shareholders the option to buy new shares at a set subscription price and ratio (e.g., 1 new share for every 4 held).
• TERP is useful for investors deciding whether to exercise, sell, or buy rights and for arbitrage strategies during the offering period.

Why TERP matters

• Measures dilution: TERP quantifies how issuing discounted shares dilutes existing ownership and value per share.
• Decision tool for shareholders: comparing TERP, the subscription price, and personal expectations of future appreciation helps shareholders decide how to act.
• Arbitrage and trading: rights and the underlying shares may trade during the offering, creating short-term opportunities based on differences between market price and TERP.

How to calculate TERP

General approach:
TERP = (Market value of existing shares + Funds raised from new shares) / Total shares after issue

If P = pre-offer market price, S = subscription (issue) price, and the rights ratio is “N for 1” (you need N existing shares to subscribe for 1 new share), then:
TERP = (N × P + S) / (N + 1)

This formula assumes the rights offering is fully subscribed at the stated terms.

Example

Company share price (P) = $10
Rights ratio = 4 for 1 (N = 4) — one new share can be bought for every 4 shares held
Subscription price (S) = $6

TERP = (4 × 10 + 6) / (4 + 1) = (40 + 6) / 5 = $9.20

Interpretation: immediately after a fully subscribed rights issue, the theoretical share price would be $9.20, down from $10 before the offering.

Investor considerations

• Exercise vs. sell rights: Compare the cost to exercise (S) and the resulting ownership share to TERP and your outlook for the stock. Exercising preserves proportional ownership; selling rights realizes value without additional cash outlay.
• Partial subscription scenarios: TERP depends on how many rights are exercised. If less than 100% are subscribed, actual post-issue price can differ from the TERP computed assuming full subscription.
• Market forces: TERP is theoretical. Actual market price after the offering will also reflect demand, company prospects, and sentiment.
• Arbitrage opportunities: Traders may buy or sell rights during the offering to profit from discrepancies between market prices and TERP, but such strategies carry execution and market-risk.

Limitations and practical notes

• TERP assumes the offering is fully subscribed at the announced terms; real outcomes often differ.
• Disclosure and timing: companies may announce different terms, and rights can trade for a limited period—accurate TERP estimates require up-to-date information on ratio, subscription price, and expected take-up.
• Transaction costs, taxes, and liquidity constraints can affect the practical value of rights and any arbitrage.

Conclusion

TERP provides a straightforward, theoretical measure of how a rights offering dilutes share value. Use the TERP formula to estimate post-offering price under different subscription scenarios, then combine that insight with market conditions and personal investment goals to decide whether to exercise, sell, or ignore rights.