Theoretical Ex-Rights Price (TERP)
Definition: Theoretical Ex-Rights Price (TERP) is the theoretical market price of a company’s stock following a new rights issue. A rights offering allows existing shareholders to purchase additional shares, often at a discount to the current market price, which leads to an increase in the total number of shares outstanding and generally results in a dilution effect on the stock price.
| TERP | Current Share Price |
|---|---|
| The theoretical price after a rights issuance, adjusted for the new shares and their discounted pricing. | The market price before the issuance, often higher than the TERP. |
Example:§
- A company with a current share price of $50 announces a rights issue at $40 per share for existing shareholders. If the company issues 1 new share for every 2 shares held, the TERP can be calculated as follows:
Important Related Terms:§
- Rights Issue: A way companies raise funds by giving existing shareholders the right to buy additional shares at a discounted price.
- Dilution: The reduction in existing shareholders’ ownership percentage due to the issuance of new shares.
- Market Capitalization: The total market value of a company’s outstanding shares.
- Shareholder Value: Represents the value delivered to shareholders as a result of the company’s ability to grow sales, earnings, and free cash flow.
Humorous Insights:§
- “Buying the stock after a rights issue is like buying a super discount sweater – everyone else already bought it, and now the price is lower, but you can’t help but wonder if it’s worth it!” 😉
- Did you know? In the world of finance, water salesmen have been known to sell shares in water as often as rights issues occur… Just kidding! Water might actually hold more value! 😂
Frequently Asked Questions:§
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What happens to existing shares after a rights issue?
- Existing shares may become diluted, which can reduce their value due to an increased number of shares outstanding.
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Is TERP always lower than the current share price?
- Generally, yes. The TERP is typically lower than the pre-offering market price due to the increased number of shares and discounted pricing.
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Can TERP help investors make decisions?
- Yes! Investors can use TERP to gauge how a rights issuance might affect their holdings and make informed decisions about participating in the offering.
Suggested Resources:§
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Books:
- “The Intelligent Investor” by Benjamin Graham - A classic guide to value investing.
- “Financial Markets and Institutions” by Frederic S. Mishkin - This book explores the role and functioning of financial instruments.
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Online Resources:
- Investopedia – Rights Offering Definition
- Morningstar – Financial research platform with extensive resources on stock issuance.
Test Your Knowledge: Theoretical Ex-Rights Price Quiz§
Thank you for diving into the whimsical world of the Theoretical Ex-Rights Price! Remember, in investment, knowledge is wealth, and laughter can be the best currency! Keep smiling and keep investing! 😊✨
