Theoretical ex-rights price
TERP equals the old shares' market value plus rights-issue proceeds, divided by the total shares after the issue, ignoring issue costs and any change in business value unless specified. It is a benchmark rather than a guaranteed market price. The rights ratio states how many new shares can be bought for a given number already held. A shareholder who exercises or sells rights can, under the simple model, preserve value; allowing valuable rights to lapse can dilute wealth. Project value and market reaction can change the actual outcome.
Worked example
For a one-for-four issue, four existing shares trade at $6 each and one new share is offered at $4. TERP = (4 × $6 + $4)/5 = $5.60. The theoretical right attached to each existing share is $6 − $5.60 = $0.40.
Common mistake
Reversing a one-for-four issue into four new shares per existing share, or treating TERP as a guaranteed future market price.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Supporting | September 2026–June 2027 |
| ACCA | FM | Direct | September 2026–June 2027 |
| ACCA | FR | Direct | September 2026–June 2027 |
| ACCA | SBR | Direct | September 2026–June 2027 |