The stock market can be a complex and intimidating place for investors. One of the lesser-known terms used in stock trading is Theoretical Ex-Rights Price (TERP).
The TERP is an estimate of what the price per share of stock will be after the rights issue has taken place.
Rights issues are when companies sell new, discounted shares to existing shareholders. By understanding how it works, investors can increase their chances of making profits from the stock market.
What is the theoretical ex-rights price?
A theoretical ex-rights price or TERP is how much a stock will cost after a company offers more shares. Companies do this to give more shares to shareholders, usually at a lower price. The stock’s price changes because there are now more shares available for people to buy.
The stock prices are affected by the new rights issue. This is why the TERP is important – it estimates how much a share of stock will cost after the rights issue has taken place.
These rights issues can be a great way for investors to increase their profits as the shares may be sold at a discounted price, making them attractive and easier to buy.
How is the Theoretical Ex-rights Price Calculated
Here is the formula for calculating the TERP
TERP = [(New Shares × Issue Price) + (Old Shares × Market Price)] / New Shares + Old Shares
Where
New Shares: These are the new shares of stock being offered, usually at a discounted price.
Issue Price: This is the price for each new share being offered in the rights issue.
Old Shares: These are existing shares held by current shareholders before the rights issue took place.
Market Price: This is the market price per share of the stock before the rights issue took place.
The TERP is calculated by adding the total value of the new shares being offered at a discounted price and then adding them to the total value of existing shares in the market.
The sum is then divided by the total number of both old and new shares to get an estimate of what a share will cost after the rights issue.
Example of Theoretical Ex-rights Price
For example, let’s say company ABC is offering 1,000 shares at a discounted price of $5 per share. The market price for the stock before the rights issue was $10 per share and there are 10,000 existing shares in circulation.
Using the formula above, we can calculate that the TERP would be
TERP = [(1,000 × $5) + (10,000 × $10)] / 1,000 + 10,000
TERP = ($5,000 + $100,000) / 11,000
TERP = $105,000/11,000
TERP = $9.55 per share.
This means that each share of ABC stock will be worth $9.55 after the rights issue takes place.
It is important to remember that this calculation is only an estimate and the actual price may differ from the TERP depending on market conditions at the time of the rights issue. Investors should do their research before investing in any stocks and be aware of the risks involved.
Conclusion
The TERP is a useful tool for investors to estimate the stock price after rights issues and can help them make profitable investments. However, it is important to take into account other factors such as market conditions when making an investment decision. Doing so will increase the chances of success in the stock market.
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