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HKSI PrepStudyingPaper 1
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A listed company announces a 1-for-4 rights issue at HK$8.00 per share. Its shares close cum-rights at HK$12.00. What are the theoretical ex-rights price and the theoretical value of one nil-paid right?
Theoretical ex-rights price (TERP) = (N x cum-rights price + subscription price) / (N + 1). For a 1-for-4 issue: (4 x 12.00 + 8.00) / 5 = 56.00 / 5 = HK$11.20. The value of one nil-paid right is TERP minus the subscription price: 11.20 - 8.00 = HK$3.20. HK$4.00 is the cum price minus the subscription price, which ignores the fall to TERP on the ex date. HK$11.00 deducts the HK$4.00 discount spread over four shares rather than five. HK$10.00 is a simple average of the two prices, ignoring the 4:1 weighting. Source: Standard theoretical ex-rights price formula; HKEX Main Board Listing Rules r.7.18 (as at October 2026).
Valuing the right at cum price minus subscription price. The share falls to TERP on the ex date, so the right is worth TERP minus subscription price.
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