What Is a Rights Issue?
A rights issue raises new equity by offering existing shareholders more shares, usually at a discount, in proportion to their holdings. Here's how it works and how to calculate the TERP.
A rights issue is a way for a company to raise new equity finance by offering additional shares to its existing shareholders, in proportion to their current holdings, usually at a discount to the market price. Because shareholders get the right to buy in proportion to what they already own, a rights issue lets them maintain their percentage stake if they take up the offer.
Why do companies use rights issues?
- To raise finance for expansion, acquisitions or reducing debt.
- It's often cheaper than a public issue, with lower transaction costs.
- It protects existing shareholders from dilution of control, since they get first refusal.
The theoretical ex-rights price (TERP)
A key calculation is the theoretical ex-rights price — the expected share price after the issue. It's a weighted average of the pre-issue market value of existing shares and the cash raised from the new shares, divided by the total number of shares afterwards. The TERP sits between the old market price and the discounted issue price.
The value of a right
The value of a right is the difference between the TERP and the issue price. A shareholder who doesn't want to take up their rights can often sell them, capturing this value rather than simply letting them lapse.
Rights issues are a common ACCA FM topic, and the marks come from the TERP calculation and explaining the effects. Practising these questions and marking them against the official ACCA scheme with The 50% Club shows you exactly where your workings lose marks — the fastest way to make them reliable.