What is a theoretical ex-rights price?
It denotes the market price that a single share of a company will theoretically have following a new rights issue. The theoretical ex-rights price (Terp) will usually be lower than the value of the share prior to the rights issue because the new shares are normally issued at a discount.
Key takeaways
Theoretical ex-rights price (Terp) represents the market price a company's share will theoretically have after a rights issue, usually lower than pre-issue value because new shares are issued at a discount.
Rights issues allow existing shareholders to buy additional shares at a discounted price for a limited period, with Terp calculated using the company's market capitalization and outstanding shares.
Example calculation: holding 100 shares at £9 with an offer of one new share per 10 held at £7 results in a Terp of £8.82, calculated as total value divided by total shares (£970/110).
Investors should not subscribe to new shares if the Terp falls below the rights issue price, as this calculation helps assess whether the subscription is worthwhile.
Where have you heard about theoretical ex-rights prices?
If a company chooses to offer additional shares to boost revenue, existing shareholders are given the chance to buy a proportion of these new shares at a marked down price for a specified time period. The Terp can be compared to the current share value.
What you need to know about theoretical ex-rights prices.
The Terp is based on the company's market capitalisation and number of shares outstanding.
You can make a calculation to help you assess whether it’s worth subscribing to the new rights issue. Imagine you hold 100 shares priced at £9, and are offered one new share for every 10 held, priced at £7. The Terp will be £8.82. That's £900 (100 x £9) plus £70 (10 x £7) divided by 110 (100 existing shares plus 10 new ones). If the Terp drops below the rights price, there wouldn't be any point subscribing for new shares.
Find out more about theoretical ex-rights prices.
For background information, read our definition of rights issue.