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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 $1·50Answer is 0.4
Could you please write the steps to follow this question. Ive watched your lectures and did the practice questions at the end of the chapters but those were simple in the practice tests. This got me confused. If you could write the steps Itd be very helpful and how we arrive at 0.4 and also what would be the answer if they asked ‘theoretical value of a right per share’ and not an existing one.
Thanks
This is absolutely no different to the examples that I work through in my lectures!!!
The theoretical ex rights price is ((4 x $8) + $6) / 5 = $7.60.
Therefore the value of a right is 7.60 – 6.00 = $1.60 for each new share.
Since 4 existing shares are needed to buy 1 new share, the value of the rights per existing share is $1.60 / 4 = $0.40.
Why you suggest that this is more complicated I have no idea – I do exactly the same as above in my lectures, and at least one of the practice questions is exactly the same!!
dmittal: Do not answer in this forum – it is Ask the Tutor and you are not the tutor!!
(and why on earth post a link to my lecture on YouTube? The lectures are all also available directly on this website, free of charge)And Sir one more question. In section C when they ask us NPV questions for 12 marks and they give us sales and variable costs and fixed costs and they give us inflation rates as well to adjust them. however i only am concerned about one issue. I was solving the september 2016 paper just now and the npv question in section c for sales and variable costs when they take the inflation rates for selling price per unit at and variable cost per unit they took it for 2 decimal places and when they were adjusting the fixed costs for inflation they took to 3 decimal places. my issue is that when I took 2 decimal places for fixed costs as well i was getting a difference of some amount for each because they took 3dp for fixed cost and I took 2dp for both sales and variable costs and also fixed costs. now would they award marks if I use 2dp for the whole inflation adjustments and calculate figures ? please confirm, because they havent written in the question what should be used.
Thanks
You must start a new thread when you are asking about a different topic – this has nothing at all to do with the theoretical ex rights share prices!!!!
In Section C, you do not lose marks because of roundings.
It is your workings that are marked in Section C – not the final answer.
It will make no difference to your marks whether you round to 2 dp’s or to 3 do’s (unless, obviously, it is specified in the question)
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