What does a rights price divided by TERP represent in finance?

What does a rights price divided by TERP represent in finance?

• A. Calculation for tail swallowing
• B. Determining share price
• C. Calculating future value
• D. Assessing market liquidity

Answer: (A)

The correct interpretation of what a rights price divided by the theoretical ex-rights price (TERP) represents in finance pertains to the determination of share price and its relative value during a rights issue. When a company issues rights to existing shareholders, it offers them the opportunity to buy additional shares at a specific price (rights price). The TERP is the average price per share after taking into account the new shares issued at the rights price, reflecting the fair market value of the shares post-rights issue. By dividing the rights price by the TERP, one can assess the attractiveness of the rights issue compared to the existing share price. A result greater than one might indicate that the rights issue is advantageous, as it implies that shareholders will gain value by exercising their rights. Consequently, this division serves as a meaningful metric for understanding the potential profitability or appeal of participating in the rights issue, thereby directly influencing share price valuation in the market. This calculation is essential for investors who need to make informed decisions about whether to take up the rights, as it provides insight into how the market is expected to value shares post-issue.

The correct interpretation of what a rights price divided by the theoretical ex-rights price (TERP) represents in finance pertains to the determination of share price and its relative value during a rights issue.

When a company issues rights to existing shareholders, it offers them the opportunity to buy additional shares at a specific price (rights price). The TERP is the average price per share after taking into account the new shares issued at the rights price, reflecting the fair market value of the shares post-rights issue.

By dividing the rights price by the TERP, one can assess the attractiveness of the rights issue compared to the existing share price. A result greater than one might indicate that the rights issue is advantageous, as it implies that shareholders will gain value by exercising their rights. Consequently, this division serves as a meaningful metric for understanding the potential profitability or appeal of participating in the rights issue, thereby directly influencing share price valuation in the market.

This calculation is essential for investors who need to make informed decisions about whether to take up the rights, as it provides insight into how the market is expected to value shares post-issue.