TERP, rights value and cashless take-up
Work out entitlement, subscription cash, theoretical ex-rights price and tail-swallow sizing.
Use the calculator →Alpha Investors corporate-action guide
Four announcements. Four different calculations.
Rights issues, new share issues, takeovers and scrip dividends all move value differently. Use the maths to make the mechanics explicit—then do the investment work the formula cannot.
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The organising principle
Separate the announced fact from the investor assumption.
Corporate actions often look complicated because a small number of mechanical terms sit beside much larger questions about value, incentives and risk.
Start with the issuer's announcement, prospectus or scheme document. Put the announced terms into the relevant calculator. Then write down which output is arithmetic, which input is your own assumption and which question still requires judgement.
01 · Rights issues
TERP is a reference point, not a forecast.
A rights issue gives existing shareholders an entitlement to buy new shares, normally at a discount. The theoretical ex-rights price blends the cum-rights market value with the subscription cash over the enlarged share count.
TERP = (old shares × cum-rights price + new shares × subscription price) ÷ total post-issue shares
Worked example
A 1-for-4 issue at 400p with a 600p cum-rights price gives a 560p TERP. A holder of 1,000 shares receives a 250-share entitlement and needs £1,000 to subscribe in full. The calculation does not answer whether the recapitalised company deserves that extra £1,000.
- Check whether rights are renounceable and what your broker will do if you take no action.
- Distinguish the discount to the pre-rights price from the discount to TERP.
- Use the broker's operational deadline, which may be earlier than the issuer deadline.
03 · Takeovers
The spread pays for uncertainty.
A target trading below the stated consideration offers upside if the transaction closes—but the gap is not free money or a stand-alone market probability. Timing, conditions, costs and the loss if the deal breaks belong in the same calculation.
Cash-deal spread = offer value ÷ target price − 1
Worked example
A 500p cash offer with the target at 470p has a 6.38% gross spread. If it closes in 90 days, the geometric annualised equivalent is about 28.5% before costs. An 85% close case and a 15% break-to-350p case produce an illustrative 477.5p expected value—showing why the downside assumption matters more than the annualised headline.
- Use definitive fixed consideration and permitted-dividend terms.
- For stock consideration, include the fixed exchange ratio and the economics of the hedge.
- Treat the close probability and break prices as your assumptions, never calculator facts.
04 · Scrip dividends
Equal headline value, different exposure.
A scrip election replaces cash with newly issued shares using the company's published reference price. The exact entitlement is normally rounded down to whole shares, with the fraction handled under the scheme's own terms.
Theoretical scrip shares = dividend value available ÷ published reference price
Worked example
A 1,000-share holding with a 15p dividend has a £150 cash alternative. At a 480p reference price, that equals 31.25 theoretical shares: normally 31 whole shares plus a fractional balance treated according to the scheme. The reference price is not a guaranteed trading price or necessarily a tax cost.
- Use the published scheme price rather than substituting a live quote.
- Check whether the fraction is carried, paid, sold on your behalf or forfeited.
- Do not confuse a new-share scrip with a DRIP that buys shares in the market.
One event ledger
Match each calculation to the decision it cannot make.
| Event | Announced terms | Mechanical output | Unpriced question |
|---|---|---|---|
| Rights issue | 1-for-4 at 400p; 600p cum-rights | 560p TERP; £1,000 to take 250 rights on 1,000 shares | Does the repaired business deserve more capital? |
| New issue | 20m new on 100m existing at a 20% discount | 20% share-count increase; 16.7% non-participant dilution | Will the new capital earn enough to create value? |
| Cash takeover | 500p offer; 470p target; 90 days assumed | 6.38% gross spread; 28.5% annualised equivalent | Is the spread sufficient for delay and break risk? |
| Scrip dividend | 15p dividend; 480p reference price; 1,000 shares | £150 cash or 31 whole shares plus a fraction | Is retaining equity exposure the better allocation? |
The event checklist
Run the numbers. Then name the assumption.
What changes?
Cash, share count, ownership, payoff or portfolio exposure?
Which figure is theoretical?
Separate arithmetic reference points from prices, forecasts and probabilities.
What dominates?
Write down the one judgement—proceeds use, break price, timing or concentration—that drives the decision.
When must you act?
Check the issuer terms and your broker's earlier operational deadline.