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Hi can you please help me with this MCQ?
“the share price of CP plc is $4 per share.
they announce a 1 for 5 rights issue at $3.10 per share.
What % of the rights offered to a shareholder does teh shareholder need to take up so as to have no net cash flow resulting from the issue?”Correct answer is 19.48%
Can you please explain how this figure is derived and what they mean by no net cashflow resulting from the issue? Is this taking the TERP into account?
You have obviously not been watching our free lectures! Our lectures are a complete course for Paper F9 and cover everything needed to pass the exam well. This example is explained in our lecture on rights issues.
CorrectThe TERP = ((5 x $4) + $3.10) / 6 = £3.85
If someone owned 1,000 shares before the rights issue, then they must have been worth 1,000 x $4 = $4,000.
For there to be no cash effect, they must still be worth $4,000 after the rights issue, which must been that they now own 4,000 / 3.85 = 1,038.96 shares. So they must have taken up 38.96 new shares.
There were entitled to buy 1/5 x 1,000 = 200 shares. Therefore they have actually taken up 38.96/200 = 19.48%
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