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Hi, I am having some doubt on the excersise related to Equity finance.
For instance,
Abc PLC is raising finance through a rights issue and the current ex dividend market price of its shares is £5.0. The rights issue is on a 1 for 4 basis and the new shares will be offered at a 20% discount to the current market price. Ms. Laurel is an investor who owns 10,000 shares of Able PLC.In the case of Laurel subscribes for the right issue, Do we have to calculate the current share price based on the current ex-dividend price? Please have a look on my answer and tell me whether it is right.
Current ex-dividend price: £5.0
Current share price: £5.0 : (100%-20%) = £6.25Current value of 10,000 share: 6.25 x 10,000 = £62,500
Cash for the new 2500 shares: 5.0 x 2,500 = £12,500
Value of all 12,500 shares: £75,000IN THIS CASE, THE WEALTH OF OWNER HAS NOT BEEN EFFECTED, HE JUST ONLY CONVERT CASH INTO SHARES.
I am looking forward to hearing from you soon.
Thanks.Have you watched my free lectures on rights issues? The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
Your answer is completely wrong!
The current share price is $5.00. The rights issue is therefore at 80% x $5.00 = $4.00 per share.
You then need to calculate the ex-rights price (which is $4.80 per share).
The current wealth of the owner is 10,000 x $5 = 50,000
The new wealth is 12,500 x $4.80 = 60,000.
The cash paid for the new shares is 2,500 x $4 = 10,000Again, you really should watch the lectures. Also, there is no point in attempting questions for which you do not have an answer. You must buy a Revision Kit from one of the ACCA approved publishers. They contain lots of exam standard questions, together with answers and workings!
Thank you sir !
The only thing makes me confuse is the difference between current ex-dividend price and current market price in this example.
Again, thank for your helpful advices
The current price is the current market value!! The fact it is ex-dividend simply means that they have just paid a dividend (as opposed to cum-dividend). As I explain in the lectures, we always use the ex-dividend price for calculations (for the cost of equity and well as for rights issues).
Again, I do suggest that you watch the free lectures, because I explain all of this in the lectures 🙂
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