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A company is making a rights issue at a 20% discount to its current share price of $7.50. It plans to raise $90 million. Ordinary shares ($1 nominal) is $60 million.
Kindly point out what is wrong with this my calculation of TERP:
.80 x 7.50 = $6
$7.50 × 60 million ordinary shares is $450 market value.
$450÷$90 = 1 for 5 shares.
1× 6 = 6
5 × 7.5 = 37.543.5÷6 = $7.25 Theoretical ex rights price.
The new shares are being issued at 80% x $7.50 = $6.
They are raising $90M and therefore will be issuing 90/6 = 15M shares.
Given that they currently have 60M shares, it is a 1 for 4 rights issue (not 1 for 5).
Therefore the TERP = ((4 x $7.50) + $6) / 5 = $7.20 per share.
Okay, the mistake I made was working from the market value of current shares instead of working from the rights issue, I guess!
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