When a listed company needs new equity, the fairest way to raise it is to offer the new shares to the people who already own the company, in proportion to what they own. That is a rights issue.
Nobody’s share of the company changes if they take up their rights, the company gets the cash without paying large fees to find new investors. The price is set below the market price to make taking the offer worthwhile.
But the discount has an effect on the share price that every shareholder should understand: after the issue, all the shares, old and new, are worth the same, and the price falls to a weighted average, the theoretical ex-rights price.
This topic explains how to calculate the terms of a rights issue, the theoretical ex-rights price and the value of a right, the yield-adjusted price, the choices open to a shareholder and why doing nothing costs money, the advantages and disadvantages of rights issues, and the effect of using the money to repay debt on gearing, with worked examples. The next topic covers Islamic finance.
The effect of a rights issue and debt redemption on gearing, using the ex-rights price, was tested in November Diet, 2025, Question 7(c) (6 marks). Read issuing shares: public offers, placings, underwriting and buy-backs first.
In 30 seconds
A rights issue offers new shares to existing shareholders in proportion to their holdings, at a price usually 10% to 15% below the market price (the cum-rights price). The theoretical ex-rights price (TERP) is the weighted average of the old shares at the cum-rights price and the new shares at the issue price.
The value of a right = TERP − issue price per new share (divide by the number of old shares needed to get one new share for the value per existing share). A shareholder can take up the rights, sell them, take up some and sell the rest, or do nothing; the first two leave the shareholder no better and no worse off in theory, but doing nothing loses value.
The yield-adjusted TERP adjusts the issue price in the ratio of the return on the new money to the existing return. Using the money to repay debt lowers gearing, measured on market values with the ex-rights price.
The terms and the price
A rights issue is an issue of shares for cash offered to existing shareholders in proportion to their holdings, described as, for example, “1 for 4” (one new share for every four held).
The issue price must be below the market price to give shareholders an incentive to subscribe. There is no fixed rule, but 10% to 15% below the cum-rights price is a common guide. A deeper discount may be used if the company wants to avoid the cost of underwriting.
For a company with 800m shares at ₦250, a 1 for 4 issue at ₦200 (a 20% discount) creates 800 ÷ 4 = 200m new shares and raises 200m × ₦200 = ₦40,000m (before issue costs).
The theoretical ex-rights price and the value of a right
The market price just before the issue is the cum-rights price (cum meaning with the rights). After the issue all the shares have the same price. Because the new shares are issued below the market price, the new price is lower. The theoretical ex-rights price (TERP) is the weighted average price: total value of the shares after the issue ÷ number of shares after the issue.
| Shares | Price ₦ | Value ₦ | |
|---|---|---|---|
| Existing | 4 | 250 | 1,000 |
| New | 1 | 200 | 200 |
| Total | 5 | 1,200 |
TERP = 1,200 ÷ 5 = ₦240. (The same result comes from the whole company: before the issue it is worth 800m × 250 = ₦200,000m; the cash adds ₦40,000m, giving ₦240,000m for 1,000m shares, ₦240 each.) The value of a right is what the holder gains from being able to buy a share at ₦200 that will be worth ₦240: ₦40 for each new share, or ₦40 ÷ 4 = ₦10 for each existing share.
The price of the share falls from ₦250 to ₦240 and the holder receives a right worth ₦10 per share held: there is no real gain or loss, because the fall in the price is paid for by the cash that the shareholder puts into the company.
The yield-adjusted ex-rights price
The simple calculation assumes the new money earns the same return as the old. If the money is to be invested at a different return, the market will value the new shares differently. The yield-adjusted TERP adjusts the issue price by the ratio of the return on the new project to the existing return, for the calculation only (the cash raised is unchanged).
If the existing return is 12% and the new project earns 14%, the adjusted issue price is 200 × 14 ÷ 12 = ₦233.33 and the yield-adjusted TERP is (4 × 250 + 233.33) ÷ 5 = ₦246.67, higher than the simple TERP of ₦240 because the market expects the new money to earn more.
The shareholder’s choices
A shareholder with 10,000 shares at ₦250 (value ₦2,500,000) under the 1 for 4 issue is entitled to 2,500 new shares and can:
- Take up the rights:
pay 2,500 × ₦200 = ₦500,000
holds 12,500 shares at ₦240 = ₦3,000,000
net value ₦3,000,000 − ₦500,000 = ₦2,500,000: no change. - Sell the rights: keeps 10,000 shares at ₦240 = ₦2,400,000 and sells 2,500 rights at ₦40 = ₦100,000; total ₦2,500,000: no change.
- Take up some and sell the rest: a mixture; in theory the value is again unchanged.
- Do nothing: keeps 10,000 shares at ₦240 = ₦2,400,000, a loss of ₦100,000. The company may sell the shares on the holder’s behalf and pay over any surplus above the issue price, but the holder is still likely to lose.
These values are theoretical: the actual price after the issue may be higher or lower than the TERP.
Gearing after a rights issue
If the rights issue money is used to repay debt, gearing falls twice: debt is reduced and equity is increased. Gearing may be measured on book values or on market values; on market values the equity is the number of shares after the issue multiplied by the ex-rights price.
Suppose the company above has debt of ₦90,000m and book equity of ₦60,000m, and uses the ₦40,000m raised (ignoring issue costs) to repay debt.
| Before ₦m | After ₦m | |
|---|---|---|
| Debt | 90,000 | 50,000 |
| Book equity | 60,000 | 100,000 |
| Market equity | 200,000 (800m × ₦250) | 240,000 (1,000m × ₦240) |
| Debt ÷ (debt + book equity) | 60.0% | 33.3% |
| Debt ÷ (debt + market equity) | 31.0% | 17.2% |
On market values the gearing is lower than on book values because the market value of the equity exceeds its book value. The market measure is the more relevant for the cost of capital, since it shows what the shareholders and lenders could actually realise.
Advantages and disadvantages
- Advantages: shareholders can keep the same percentage of the company and avoid dilution of control; the company cannot sell shares below the market price to outsiders at their expense; the issue costs are lower than for a public offer; and the discount makes success likely, so a deep discount can avoid the cost of underwriting.
- Disadvantages: shareholders may be unable or unwilling to invest more, which limits the amount that can be raised; there is no reason in principle to give existing shareholders preferential treatment, since they can keep their proportion by taking up their rights while a wider offer might be made at a price nearer to the market; and the process takes time and is affected by the market while the offer is open.
The ideas in more depth
Why the discount does not matter much
The size of the discount does not change the wealth of a shareholder who takes part: a lower issue price means more shares must be issued to raise the same cash, but each share is worth less. A bigger discount only makes the issue more certain of success and transfers value from those who do nothing to those who take up their rights.
What matters is the use made of the cash: if it earns more than the shareholders require, the shares will be worth more than the TERP.
Why gearing is measured at market values
The book value of equity records what shareholders paid in and what was retained, not what the shares are worth now. After a rights issue the market value of the equity changes by the cash raised and by the market’s view of the new investment. Using the ex-rights price shows the gearing that the market will see after the issue.
Sources and references
- The Companies and Allied Matters Act 2020 gives existing shareholders a pre-emptive right to be offered new shares; the Investments and Securities Act 2025 and the rules of the Securities and Exchange Commission and the Nigerian Exchange govern the procedure and timetable.
These points are stated as at 5 November 2026.
Worked examples
Example 1: the TERP. A 1 for 4 issue at ₦200; the market price is ₦250. Required: the theoretical ex-rights price.
- Value.
4 × 250 + 1 × 200 = ₦1,200. - TERP.
1,200 ÷ 5 = ₦240.
Example 2: the value of a right. TERP ₦240; issue price ₦200; 4 old shares per new share. Required: the value per existing share.
- Per new share.
240 − 200 = ₦40. - Per existing share.
40 ÷ 4 = ₦10.
Example 3: doing nothing. A holder has 10,000 shares and does nothing. Required: the loss.
- Value before.
10,000 × 250 = ₦2,500,000. - Value after.
10,000 × 240 = ₦2,400,000: a loss of ₦100,000.
How to answer in the exam
- Build the TERP table with shares, price and value, then divide.
- Show the value of rights per new share and per existing share.
- For gearing, state the measure used and use the ex-rights price for market equity.
- Comment on take-up: the choices and the effect of doing nothing.
Common mistakes in the exam
- Using the issue price instead of the cum-rights price for the old shares.
- Dividing the total value by the wrong number of shares.
- Quoting the value of a right per new share when asked per existing share.
- Forgetting that the cash raised also reduces debt or adds to equity.
- Mixing book and market values in gearing.
- Saying that a shareholder who takes up the rights has gained.
Quick revision
- TERP = (old shares × cum price + new shares × issue price) ÷ total shares.
- Value of a right = TERP − issue price, then ÷ old shares per new share for per-share value.
- Take up or sell: no change. Do nothing: loss.
- Repaying debt with the proceeds lowers gearing; use the ex-rights price.
Practice questions
These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.
Recall check: multiple choice
Question 1. A rights issue is offered to:
- The general public
- Selected institutions only
- Existing shareholders in proportion to their holdings
- Lenders
Show the answer
C. In proportion to the shares held.
Question 2. The issue price of a rights issue is usually:
- Above the market price
- Below the market price
- Equal to par
- Zero
Show the answer
B. Often 10% to 15% below.
Question 3. The theoretical ex-rights price is:
- A weighted average of the cum-rights price and the issue price
- The issue price
- The cum-rights price
- Par value
Show the answer
A. Weighted by the numbers of shares.
Question 4. For a 1 for 4 issue at ₦200 with a market price of ₦250, the TERP is:
- ₦250
- ₦200
- ₦225
- ₦240
Show the answer
D. (4 × 250 + 200) ÷ 5.
Question 5. The value of a right per new share is:
- Issue price − TERP
- TERP − issue price
- TERP + issue price
- Cum price − issue price
Show the answer
B. The gain from buying below the ex-rights price.
Question 6. A shareholder who takes up the rights is in theory:
- No better and no worse off
- Better off
- Worse off
- Penalised
Show the answer
A. The fall in price is paid for by the cash invested.
Question 7. A shareholder who does nothing:
- Gains
- Is unaffected
- Loses value as the price falls to the TERP
- Gets a dividend
Show the answer
C. Without selling or taking up the rights.
Question 8. An advantage of a rights issue is that it:
- Raises unlimited funds
- Needs no discount
- Is the fastest method
- Preserves existing shareholders’ proportions
Show the answer
D. It avoids dilution of control.
Question 9. The yield-adjusted TERP adjusts the issue price by:
- The tax rate
- The inflation rate
- The ratio of the return on the new money to the existing return
- The number of shares
Show the answer
C. For the calculation of the price only.
Question 10. Using rights issue proceeds to repay debt:
- Reduces gearing
- Increases gearing
- Has no effect
- Increases debt
Show the answer
A. Debt falls and equity rises.
Section B style: written questions
Question 11 (10 marks). (a) Define a rights issue and the cum-rights price. (3 marks) (b) State THREE advantages. (3 marks) (c) State the choices open to a shareholder and which one loses value. (4 marks)
Question 12 (15 marks). A company announces a 3 for 5 rights issue at ₦150; the market price is ₦180. A shareholder holds 2,000 shares. (a) Calculate the TERP. (4 marks) (b) Calculate the value of a right per new share and per existing share. (4 marks) (c) Show the shareholder’s position if the rights are taken up. (4 marks) (d) State the value if nothing is done. (3 marks)
A further written question
Question 13 (20 marks). A company has 500m shares at ₦400, debt of ₦60,000m and book equity of ₦80,000m. It makes a 1 for 5 rights issue at ₦320 and uses all the proceeds, ignoring costs, to repay debt.
(a) Calculate the number of new shares and the cash raised. (4 marks) (b) Calculate the TERP. (4 marks) (c) Calculate gearing, debt ÷ (debt + book equity), before and after. (5 marks) (d) Calculate gearing, debt ÷ (debt + market equity), before and after, using the TERP. (5 marks) (e) State why the market measure is used. (2 marks)
Model answers
Show the model answer to Question 11
(a) An issue of shares for cash offered to existing shareholders in proportion to their holdings (2); the cum-rights price is the market price just before the issue, with the right to the new shares (1).
(b) Avoids dilution of control; avoids selling shares cheaply to outsiders; lower issue costs; a discount makes success likely (1 each, any three).
(c) Take up the rights; sell them; take up some and sell the rest; do nothing (3); doing nothing loses value (1).
Show the model answer to Question 12
(a)
- 5 × 180 + 3 × 150 = 900 + 450 = 1,350
- ÷ 8 = ₦168.75 (4).
(b)
- 168.75 − 150 = ₦18.75 per new share (2)
- × 3 ÷ 5 = ₦11.25 per existing share (2).
(c) New shares 2,000 × 3 ÷ 5 = 1,200 costing ₦180,000; 3,200 shares × ₦168.75 = ₦540,000; net ₦360,000, equal to the original 2,000 × ₦180 (4).
(d) 2,000 × ₦168.75 = ₦337,500, a loss of ₦22,500 (3).
Show the model answer to Question 13
(a)
- 500m ÷ 5 = 100m new shares
- cash 100m × ₦320 = ₦32,000m (4).
(b) (5 × 400 + 320) ÷ 6 = 2,320 ÷ 6 = ₦386.67 (4).
(c)
- Before 60,000 ÷ (60,000 + 80,000) = 42.9%
- after debt 28,000 and book equity 112,000: 28,000 ÷ 140,000 = 20.0% (5).
(d)
- Before market equity 500m × 400 = 200,000: 60,000 ÷ 260,000 = 23.1%
- after 600m × 386.67 = 232,000: 28,000 ÷ 260,000 = 10.8% (5).
(e) Market values show what the equity and debt could actually be realised for, and are the basis of the cost of capital (2).
Pathfinder on Rights issues
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
Part (c) (6 marks) asks for the gearing after a rights issue and the redemption of debt, using the ex-rights price; parts (a) and (b), on book and market gearing and its benefits and weaknesses, belong to the topics on gearing.
Revise first: Gearing after a rights issue
Source: ICAN Pathfinder, Financial Management. Diets covered: Every diet in the Pathfinder, November Diet, 2025 and May Diet, 2026, was reviewed here. The diets listed above test this topic directly..
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