How to Calculate TERP

Seasoned equity offerings can reduce the value of all shares.

During a rights issue, a company raises capital by offering new shares of its stock to its shareholders. In theory, the shareholders will buy all the new offerings, and this trade will change the price of the company's shares. The theoretical ex-rights price estimates the shares' financial value after the trade, showing shareholders if it is worth exercising their rights to buy new shares or not.

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Step 1

Determine the portion of the company's final shares that exist pre-offering. For instance, if a company moves for a 1-for-4 rights issue: 4 ÷ (1 + 4) = 0.8.

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Step 2

Subtract this answer from 1: 1 - 0.8 = 0.2. This is the portion of the total shares that the issue represents.

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Step 3

Multiply the shares' portion by the share price before the rights issue. For instance, if the shares sell at a price of $2.10: 0.8 × $2.10 = $1.68.

Step 4

Calculate the price of the newly issued shares. For example, if the company offers them at a 10 percent discount: $2.20 × [(100 - 10) ÷ 100] = $1.98

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Step 5

Multiply this price by the decimal value from Step 2: $1.98 × 0.2 = $0.396

Step 6

Add together the prices from Steps 3 and 5: $1.68 + $0.396 = $2.08. This is the theoretical ex-rights price.

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