How to Calculate TERP and the Value of a Right: Rights Issue Interview Walkthrough

Short answer: Calculate TERP as [(existing shares x cum-rights price) + (new shares x subscription price)] divided by total shares after the issue. The value of one right is the cum-rights price minus TERP. EPS dilution is the change from net income divided by old shares to net income plus the after-tax benefit of the proceeds divided by new total shares. Everything else in the question is a variation on those three lines.

Rights issue questions are popular in equity capital markets and corporate finance interviews precisely because they are quick to ask and quick to get wrong. The arithmetic takes under two minutes on paper, but the marks are awarded for the order in which you do it, the reference price you quote your discount against, and whether you can explain what the numbers mean once you have them. This walkthrough runs the full sequence on a single set of numbers, then repeats it on two variations so the method rather than the answer sticks.

The information you will be given

Almost every version of this question supplies the same six or seven inputs. Learn to spot them and the rest is mechanical.

If you would rather try the question cold before reading the method, the full version with follow-ups is published as a rights issue case study on TERP, dilution and the placement comparison. For the underlying concepts rather than the calculation, start with the companion explainer on what a rights issue is and how pre-emption rights work.

Step 1: Convert the ratio into new shares

New Shares = Existing Shares x (new per ratio / existing per ratio)

New Shares = 200.0m x (1 / 4) = 50.0m. Post-issue share count is 200.0m + 50.0m = 250.0m.

The ratio trap

A 1-for-4 rights issue means one new share for every four already held, so the share count rises by 25%, not by 20% and not by 100%. Some markets, and some interviewers, express the same thing as a 4-for-1 issue meaning four existing shares entitle you to one new one. Say your interpretation out loud before you calculate: "I am reading this as one new share per four held, so a 25% increase in share count." If you have misread it, you get corrected before the error propagates through five more lines.

Step 2: Gross proceeds, then net proceeds

Gross Proceeds = New Shares x Subscription Price = 50.0m x EUR 20.00 = EUR 1,000.0m

Net Proceeds = Gross Proceeds x (1 - Fee Rate) = EUR 1,000.0m x 0.98 = EUR 980.0m

Keep these two numbers separate in your head from the start, because they are used in different places. Gross proceeds go into TERP, because TERP is about how much value the shares represent, and the market does not care that the company paid its banks. Net proceeds go into the EPS calculation, because only the cash that actually lands can repay debt or buy assets.

Step 3: TERP

TERP = [(Existing Shares x Cum-Rights Price) + (New Shares x Subscription Price)] / (Existing Shares + New Shares)

Plugging in the values from Steps 1 and 2:

TERP = [(200.0m x EUR 25.00) + (50.0m x EUR 20.00)] / 250.0m = (EUR 5,000.0m + EUR 1,000.0m) / 250.0m = EUR 24.00

The faster mental route

You can shortcut the whole thing by thinking in market capitalisation rather than per-share prices. Pre-issue market value is EUR 5,000.0m. The company receives EUR 1,000.0m of cash. Post-issue market value is therefore EUR 6,000.0m spread over 250.0m shares, which is EUR 24.00. Framed this way it is obvious that TERP is not a valuation, it is an accounting identity, and it is much harder to misremember under pressure than a four-term fraction. It is the same value-per-share logic used when you bridge enterprise value to equity value and then divide by share count.

Sense-check your answer

TERP must always sit strictly between the subscription price and the cum-rights price. If your answer is above EUR 25.00 or below EUR 20.00 you have made an arithmetic error, most often by using the wrong share count in the denominator. Say the check out loud, it costs three seconds and it is exactly the kind of self-correction interviewers are watching for.

Step 4: The value of one right, calculated two ways

Route one: Value of One Right = Cum-Rights Price - TERP = EUR 25.00 - EUR 24.00 = EUR 1.00 per existing share

Route two: Value per New Share = TERP - Subscription Price = EUR 24.00 - EUR 20.00 = EUR 4.00, and because four rights are needed for one new share, EUR 4.00 / 4 = EUR 1.00 per right

Being able to produce both routes is the single most reliable way to show you understand the structure rather than a formula. The first route measures what a shareholder loses on each share they already own as the price resets; the second measures the gain embedded in each new share they can buy. They must agree, and if they do not, your ratio handling is wrong.

A useful extension the interviewer may ask for: what happens to a shareholder who owns 1.0m shares and does nothing? Their stake falls from 0.50% to 0.40% of the company and they forfeit about EUR 1.0m of right value. If they sell the rights instead, they still fall to 0.40% but receive roughly EUR 1.0m in cash, leaving them economically flat.

Step 5: Quote the discount against the right reference

Discount to TERP = (TERP - Subscription Price) / TERP = EUR 4.00 / EUR 24.00 = 16.7%

Discount to cum-rights price = (Cum-Rights Price - Subscription Price) / Cum-Rights Price = EUR 5.00 / EUR 25.00 = 20.0%

The market convention, and the number printed in the announcement, is the discount to TERP. Quoting 20.0% is the classic slip, and it matters because it overstates the concession the company made by more than three percentage points. If you are unsure in the moment, give the TERP-based figure and name the alternative: "16.7% to TERP, which is the convention, or 20.0% against the last close." That phrasing is impossible to mark down.

Step 6: EPS dilution

Take it in three lines and do not shortcut the tax effect.

Pre-Issue EPS = EUR 300.0m / 200.0m = EUR 1.50

Interest Saved After Tax = Net Proceeds x Interest Rate x (1 - Tax Rate) = EUR 980.0m x 0.05 x 0.75 = EUR 49.0m x 0.75 = EUR 36.8m

Post-Issue EPS = (EUR 300.0m + EUR 36.8m) / 250.0m = EUR 336.8m / 250.0m = EUR 1.35

EPS Dilution = (EUR 1.35 - EUR 1.50) / EUR 1.50 = -10.2%

Why the transaction dilutes even though it is sensible

Share count rises 25% while net income rises only about 12%. The mismatch is structural: the after-tax cost of the debt being retired is 5.0% x 0.75 = 3.75%, whereas the new equity implicitly demands a return closer to the company's cost of equity, comfortably into double digits. Swapping cheap capital for expensive capital always dilutes EPS, which is why EPS alone is a poor test of whether a deleveraging equity raise was a good idea. Add the counterpoint unprompted: lower leverage cuts financial risk, reduces the chance of a covenant breach and should lower the cost of equity over time.

If the proceeds fund an acquisition instead

The denominator behaves identically. The numerator becomes the target's net income plus realised synergies rather than a clean interest saving, so the answer turns on the acquired earnings yield versus the yield the new shares must carry. That is exactly the test applied in a step-by-step accretion and dilution walkthrough, and the practice case on the basic accretion dilution concept is the fastest way to make the comparison automatic.

Step 7: The placement capacity check

The most common conceptual follow-up is why the company did not simply place shares with institutions overnight. Answer it with numbers, not adjectives.

Maximum Placement Shares = Existing Shares x Non-Pre-Emptive Authority = 200.0m x 0.10 = 20.0m shares

Placement Price = EUR 25.00 x (1 - 0.05) = EUR 23.75

Maximum Placement Proceeds = 20.0m x EUR 23.75 = EUR 475.0m

Against EUR 1,000.0m required, the placement falls short by EUR 525.0m. It is not rejected on principle, it is rejected on capacity: raising the full amount that way would require a shareholder meeting to disapply pre-emption rights, which takes weeks and eliminates the speed advantage that is a placement's only real edge. Add the fairness point second, not first: a placement gives non-participating holders no compensating instrument, whereas the EUR 1.00 right makes the pre-emptive structure economically neutral.

Variation A: a smaller 1-for-5 issue

Same 200.0m shares at EUR 25.00, but a 1-for-5 ratio at a subscription price of EUR 18.00.

Cross-check the right value: EUR 23.83 - EUR 18.00 = EUR 5.83 per new share, divided by the five rights required, gives EUR 1.17. The routes agree.

Variation B: a deeply discounted 2-for-1 rescue issue

Same base, but a 2-for-1 issue at EUR 10.00, the kind of terms a company in distress is forced to accept.

A non-participating shareholder falls from 100% to 200.0m / 600.0m, or 33.3%, of the company. The headline 60% discount looks brutal, but the right is worth EUR 10.00 per share held, so a holder who sells is still compensated in theory. The deep discount exists to make it almost impossible for the shares to trade below EUR 10.00 during the offer period, which protects the underwriters and gets the money raised. That is a risk-management choice, not a statement that the equity is worth EUR 15.00.

Five mistakes that cost marks

• Using net proceeds in TERP. Fees reduce the cash the company keeps, not the number of shares issued or the price paid for them. TERP is always built on gross.
• Quoting the discount to the last close. The convention is the discount to TERP. Give that figure first.
• Forgetting to tax-effect the interest saving. Using EUR 49.0m instead of EUR 36.8m understates dilution by roughly five percentage points.
• Confusing the right value with the per-new-share discount. EUR 1.00 and EUR 4.00 are both correct answers to different questions; say which one you are giving.
• Calling the price drop a loss. Market capitalisation rose. Only a shareholder who neither subscribes nor sells is actually worse off.

A sixth, subtler error is mixing this up with option-driven dilution. A rights issue creates new shares for cash at a stated price; options and convertibles create potential shares that are handled through the treasury stock method. If that boundary is fuzzy, work through the treasury stock method walkthrough and the diluted share count case alongside this one.

How to structure the answer out loud

Interviewers are grading sequence as much as arithmetic. A clean delivery sounds like this:

• Restate the ratio and confirm the share count increase in percentage terms.
• Give gross proceeds, then flag that fees only affect the net figure.
• Give TERP via the market capitalisation route, then sense-check that it sits between the two prices.
• Give the right value and cross-check it against the per-new-share discount.
• Give the discount to TERP, naming the convention explicitly.
• Give pre and post EPS with the tax-effected benefit shown, then state the dilution percentage.
• Close with the structural point: why a placement could not have raised this amount.

That is roughly ninety seconds of speaking and it covers every mark available. The same discipline of stating the formula, naming the inputs and sense-checking the output applies across the valuation track, from valuation multiples through to the mechanics tested in the full enterprise value to equity value bridge. If your interview is ECM-focused, pair this with the pricing mechanics in IPO pricing and stabilisation, which uses the same discount-for-certainty logic in a different setting.

Key takeaways

• Three formulas carry the whole question: new shares from the ratio, TERP from gross proceeds, right value as cum-rights price minus TERP.
• Compute TERP via market capitalisation rather than the long fraction, and check it lands between the subscription and cum-rights prices.
• Always tax-effect the earnings benefit of the proceeds before calculating post-issue EPS.
• Quote the discount to TERP, and say so.
• Answer the placement follow-up with a capacity calculation, not an opinion.

Run the numbers yourself on the full rights issue case study, then stress-test the concepts in the dilution deep dive and the convertible bonds case, which covers the other main route to equity dilution in capital markets.