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The share price of cp Plc is $4 per share. They announced a 1 for 5 rights issue at $3.1 per share.
What percentage of rights offered to share holder does the share holder need to take up so as to have no net cash flow resulting from the issue
A. 20.00%
B. 16.67%
C. 17.72%
D. 19.48%The TERP is $3.85 per share
For their to be no cash flow effect, the total value of the shares after the rights issue must be equal to the total value before the rights issue.
So…if they had (say) 1000 shares before the rights issue, they would have been worth $4000. To be worth $4000 after the rights issue, then they must then own 4000 / 3.85 = 1039 shares.
So they must have taken up 39 of the 200 shares they were entitled to, which is 39/200 = 19.5%.
(For a detailed explanation you should watch the free lecture where I go through a very similar example and explain).
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