What does the Bonus Fraction for a rights issue represent?

The Bonus Fraction for a rights issue is a measure that indicates the proportion of new shares being issued relative to the total value of the existing shares, adjusted for the new issuance. The correct answer, which states that the Bonus Fraction is represented by the formula Actual price divided by TERP (Theoretical Ex-Rights Price), is grounded in the way rights issues affect share prices.

When a company issues new shares, the TERP provides an average price at which the existing and new shares will be traded post-issue. The Actual price refers to the price at which the rights are being offered to existing shareholders. By calculating the ratio of the Actual price to the TERP, you can determine how much of the new issue is effectively diluting or enhancing the value of the existing shares.

The importance of this ratio lies in understanding how much value each existing shareholder retains in comparison to the newly issued shares. A higher ratio suggests lesser dilution and potentially more value retention for existing shareholders, while a lower ratio indicates higher dilution.

Thus, the formula directly reflects the relationship between the actual price of the rights and the theoretical price adjusted for the issuance, making it a critical component for evaluating the impact of the rights issue.