Hypothetical Ex-Rights Price - TERP

What Is a Theoretical Ex-Rights Price - TERP?

A hypothetical ex-rights price (TERP) is the market price that a stock will hypothetically have following another rights issue. Companies might utilize another rights issuance to offer more shares to shareholders, for the most part at a discounted price. Stock prices are impacted by new rights issuance since it increases the number of shares outstanding.

Hypothetical Ex-Rights Price Explained

A hypothetical ex-rights price is a consideration for stock issued through a rights offering. Normally, rights offerings are just accessible for current shareholders and just offered for a brief time frame (roughly 30 days). Rights offerings normally give shareholders the option to buy a proportioned number of shares at a discounted, pre-indicated price. The portion every shareholder is permitted to purchase depends on the shareholder's current stake in the organization. The goal is to raise extra capital with preference given to current shareholders.

Stock rights offerings can be a well known event for investors and traders as they might make potential arbitrage opportunities through the rights offering period. Overall the rights offering period can fairly moderate efficient market trading as it makes vulnerability over the stock's price.

Generally, stock rights offerings are devices managers can use in raising capital through the stock. Management might decide to utilize stock rights offerings to produce extra interest in a company's stock. Since rights offerings are generally offered at a discounted price, stock rights ordinarily have a diluting effect on a stock's price. Accordingly, the TERP is normally lower than the pre-offering market price.

Calculation of a Theoretical Ex-Rights Price

The hypothetical ex-rights price is typically calculated promptly following the last day of a stock's rights offering. This calculation makes the stock's price fairly erratic and possibly more tempting for arbitrage trades all through the rights offering period.

The easiest method for making a TERP estimate is to add the current market value of all shares existing before the rights issue to the total funds raised from the rights issue sales. This number is then partitioned by the total number of shares in existence after the rights issue is complete. This calculation brings about the value of an individual share after the offering.

All through the offering period, a wide range of investors can guess on the number of shares expected to be taken by shareholders, yet typically, just current shareholders can partake. The basis for speculation in this scenario includes the number of share rights accessible, the expected demand, and the rights offering price. Companies might have different types of disclosure for this data which can make the estimate even more troublesome.

The hypothetical ex-rights price (TERP) is in many cases lower than the stock's price before the offering since rights offerings are typically discounted, weakening the stock price.

Investor Analysis

Investors can compare the TERP to the current value of a share and their expectations for future market appreciation. Since rights are offered at a discounted price, the more rights exercised, the more the stock's price becomes diluted. Nonetheless, all through the rights offering period, supply demand actually influence the market price so while dilution is happening, investor demand can in any case increase the overarching market price. Investors who are bullish on the stock long term might be more propelled by the offering while bearish or short-term investors may not see as much upside.

Genuine Example

Management of ABC Company has decided to issue a rights offering. The provisions of the offering permit every shareholder to buy shares in the offering in light of the percentage of their outstanding shares. The new shares are offered to investors at a discounted price to the market price. Shareholders can utilize the TERP to determine the estimated value of the shares after the rights issue. This amount will vary from the current market price.

It is feasible for various hypothetical estimated values to be calculated for the stock before the finish of the offering period in view of a few unique scenarios. An investor could take a gander at the TERP value if 25% of the shares are purchased in the rights offering versus half, 75%, or 100%. Overall the more shares bought, the greater the potential for dilution when the shares are sold at a discounted offering price.

Features

• Regularly, rights offerings allow shareholders the opportunity to buy more shares at a discounted price, causing a dilution effect.
• TERP is the hypothetical market price of a stock after the completion of a rights offering.
• Generally, the TERP will be lower than the pre-offering market price quickly following the rights giving period.
• New rights issues bring about an increase in the number of shares accessible and thusly affect the price of the underlying stock.