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I’m a little bit confused about one part of this question.
In part (b), section (iv), it asks for the market capitalisation of THP, which I was able to correctly work out as $17.92m. I got this figure by multiplying the new total number of shares by the TERP, and then deducting the issue cost.
However, for part (d), section (i), it asks what seems to me to be effectively the same question, yet it gets a different answer, because it uses a market capitalisation of CRX derived from the P/E ratio method this time.
So my question is, why are they using different methods for part (b) and (d)? Thanks for your help.
In part (b) you were told to ignore what the finance raised was being used for. The TERP ignores what they are doing with the new finance. In practice, if shareholders think that the finance is being invested well, then the share price will be higher than the theoretical price.
In part (d) you were asked what would be the share price if shareholders did know what the finance was being used for. Although it is not specifically ask for the PE ratio to be used, there was no other way it could be estimated (and the clue was in part (c) where you had been asked about the PE ratio.
Thanks for that, I get it now. So part (d) was effectively asking how good a deal it was?
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