- This topic has 1 reply, 2 voices, and was last updated 8 years ago by
.
- Posts
Drumlin Co has $5m of $0·50 nominal value ordinary shares in issue. It recently announced a 1 for 4 rights issue at $6 per share. Its share price on the announcement of the rights issue was $8 per share.
What is the theoretical value of a right per existing share?
A $1·60
B $0·40
C $0·50
D $1·50
_________________________________________
Help please, I am facing trouble working through this one.I assume that you have watched my free lectures, in which case you will be happy that the TERP is ((4 x $8) + $6) / 5 = $7.60 per share.
Therefore the value of the rights for each new share is 7.60 – 6 = $1.60.
The question asks for the value per existing share and since 4 existing shares are required for each new one, the value per existing share is $1.60/4 = $0.40.
- The topic ‘September 16 Question 15’ is closed to new replies.