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I have two doubts in the same question,
(A) In part (a) of the question, I have calculated the revised share price which is $3.11(same as the answer given in BPP) but total shareholder wealth stated in BPP exam kit is as follows
“Share price of Grenarp Co after redeeming loan notes = 8.33 X 0·373 = $3.11 per share (total market value =$3.11 X 20m shares = $62.2m)”
Shouldn’t the MV of shares be equal to $3.11 X 24M shares = 74.64m because extra 4m shares comes from rights issue?
(B) in alternative solution, BPP has mentioned this below
“The new value of the shares can be estimated as $8.96m x 8.33 which is approximately $74.64m.
So, after subtracting the $11.2m invested in the rights issue, shareholders wealth has become $74.64m – $11.2m = $63.44m (or $3.17 per share).
This is a fall in shareholder wealth of $6.56m.”I didn’t understand (why 11.2m was subtracted from MV of shares?) and (From where 6.56m came from?)
Thanks
A. Which edition of the BPP Revision Kit are you using? I have the current edition and it says “total market value = $3.11 x 24M shares = $74.64M”
B. Again the answer is my edition of the Revision Kit is different.
The new value of the shares is $8.96 x 8.333 which is approximately $74.66M.
Shareholders had to pay in $11.2M, and so their wealth has decreased. The value of their shares has increased by $74.66 – $70 = $4.66, but they had to pay for the rights $11.2M and so overall their wealth has decreased by 11.2 – 4.66 = $6.54M.A. I am using BPP Revision kit (for exams in september 2017, december 2017, march 2018 and june 2018) because there were no changes in the syllabus. Not the current edition. Might be possible that there is a mistake in the old edition?
B. Yes, I got it. I guess you meant ”they had to pay for the Loan notes”(which is redeeming Loan notes) instead of “they had to pay for the rights”.
A It seems as though there is a mistake in your edition.
B No – I meant what I wrote 🙂 They had to pay to take up the rights, and that reduces their overall wealth (as I explain in my free lectures).
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