Theoretical Ex-Rights Price (TERP) Explained

The theoretical ex-rights price (TERP) is the expected share price immediately after a rights issue goes ex-rights—computed by spreading the company’s pre-rights market capitalization over the larger post-dilution share count. It tells shareholders what a “fair” stock price should be once the dilution from new share issuance takes effect.

The Rights Issue Context

When a company needs capital, it may issue rights that allow existing shareholders to buy new shares at a discounted subscription price—typically locked in weeks or months in advance. On the ex-rights date, the stock price typically falls because the company’s value is now divided among more shares. The theoretical ex-rights price predicts that floor, isolating pure dilution from market reaction.

The math is straightforward: if you own the company and issue new equity without changing its economic value, each old share’s claim on that value shrinks. TERP captures this mechanical effect before sentiment or news moves the needle.

The TERP Formula Step by Step

The most common formula is:

TERP = (Current price × Number of old shares + Subscription price × Number of new shares) ÷ (Number of old shares + Number of new shares)

Let’s work through a concrete example:

• Current stock price: $100
• 10 million shares outstanding
• Rights issue: one new share for every four existing shares at a subscription price of $75
• New shares issued: 2.5 million

TERP = ($100 × 10M + $75 × 2.5M) ÷ (10M + 2.5M) TERP = ($1,000M + $187.5M) ÷ 12.5M TERP = $1,187.5M ÷ 12.5M = $95

The theoretical ex-rights price is $95. This is the weighted-average price of the “old” shares (at full value) and the “new” shares (at the heavily discounted subscription price).

Why TERP Is Not a Guarantee

TERP assumes the company’s total market value stays constant at the moment rights are issued. In reality, the actual ex-rights price often diverges. Here’s why:

Market enthusiasm for the capital raise. If investors believe the proceeds will be deployed in high-return projects, they may bid the stock up above TERP. Conversely, if the raise signals desperation or low returns, the stock can fall below TERP.

Existing shareholder sentiment. Shareholders face a choice: take up their rights (invest more cash) or sell them and accept dilution. If many choose not to subscribe, that signal of weakness can push the price below TERP. Heavy take-up signals confidence and can support a price at or above.

Market conditions between announcement and ex-date. A sharp market decline or company-specific bad news can lower the stock’s base value, dragging it below TERP. A bull market or acquisition rumor can lift it above.

Timing of capital deployment. If the new capital is deployed immediately in a profitable venture, value accrues before or at the ex-date. If deployment is slow, the market may penalize the stock for holding cash.

TERP is most useful as a reality check: if the actual ex-rights price is far below TERP, and the market backdrop hasn’t worsened, it suggests shareholders are skeptical of the capital raise. If it’s above TERP, the market is pricing in tangible value from the new capital.

Using TERP to Evaluate Rights

From a shareholder’s perspective, TERP is a baseline for deciding whether to take up rights or sell them:

If the subscription price is below TERP, taking up rights is mathematically attractive—you buy new shares at a bargain. The $75 subscription price in our example is well below the $95 TERP, so new shares are a steal.

If the market price falls significantly below TERP on the ex-date, selling rights (rather than exercising) may be the rational choice, since the new shares would be bought at a steep discount to fair value.

If the rights themselves trade, the value of a right can be estimated as the difference between TERP and the subscription price, divided by the ratio of new to old shares. In our example, each right should be worth roughly ($95 − $75) ÷ 4 = $5. If rights trade well below this, it signals market skepticism.

The Role of Take-Up Rates

Not all shareholders exercise their rights. A low take-up rate means fewer new shares are issued than the company planned, reducing actual dilution. Conversely, a high take-up rate means the full dilution occurs. The company typically runs the rights issue over a period (30–45 days) to maximize subscription, and TERP is usually calculated using the full planned issuance, not the expected take-up.

This creates asymmetry: TERP assumes the maximum dilution, so if actual take-up is lower, the final ex-rights price may be higher than TERP.

TERP in Real Markets

In liquid, efficient markets, the ex-rights price typically converges to TERP within days of the ex-date, especially once the new shares begin trading. In less liquid stocks, TERP can be a useful anchor for dealers and large traders marking the value of new shares.

The formula also works in reverse: if you know the actual ex-rights price and the terms of the issue, you can back out what the market assumed about the value of the capital being raised—a useful diagnostic for understanding how investors viewed the rights offer.

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