NISM Certifications · NISM-Series-XV: Research Analyst · Corporate Actions
A stock trades cum-rights at Rs 260. The company offers 1 rights share for every 3 held at Rs 140. What is the theoretical ex-rights price (TERP)?
The theoretical ex-rights price is Rs 230. It is the weighted average of three old shares at Rs 260 and one new share at Rs 140, that is Rs 920 divided by four shares.
- ARs 230Correct
- BRs 200
- CRs 245
- DRs 240
Explanation
TERP = (3 x 260 + 1 x 140) / 4 = (780 + 140) / 4 = 920 / 4 = Rs 230. Rs 200 is the simple average of 260 and 140 only if weights are equal (it equals 200), which ignores the 3:1 weighting. Rs 240 would result from using 1 old share for 1 right share weights incorrectly.
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