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Hi my Dear tutor, I have the same type of question but I would like to compare them with
one another by showing one important detail for me and I will seperately solve it and will want to show it.Question 31
Before issue of 5 shares @ 5$======25$
After issue of 1 share @ (5$*0.8)-4$$==4$TERP=29$/6 shares=4.83
Alternative way
cash raised=2000$
right issue shares=2000/4=500 or existing shares in number 2500/1$=250081/5=500
existing shares=2500/1$=2500
Total shares after market listing=500+2500=3000(ordinary shares)
TERP=500*4$+2500*5$/500+2500=4.83$I know debit and credit does not need here but I just would like to touch my main point for the second question.
Debit cash-2000
Credit SC–500 (500*1$)
Credit SP-1500 (500*3$=(4$-1$)In the Question 4 there has not been given ex-dividend share price like compared to Question 32.
Net cash raised after issue cost=3200000
Total cash raised before issue cost=3200000+100000=3300000$
Right Issue shares=3300000/2.50=1320000
Existing shares=5000/0.50=10000000
Total shares after market listing=10000000+1320000=11320000Let us find ex-dividend market price per total shares=1600000*(1.03)/0.09-0.03=27466667
Ex-dividend market price per share=27466667/10000000(existing shares number)=2.75$If I find here ex-dividend market price per share then
TERP=1320000*2.50+2.75$*10000000/11320000=2.72$
Debit cash raised-3300000$
Credit SC-660000-(1320000*0.50$)
CreditSP-2640000-(1320000*(2.50$-0.50$-nominal value)In the question 31, ex-dividend market price is given but in the question 4 this figure has not been given and I found it(ex-div market price per share) in the question 4 and divided it into number of ordinary shares before right issue shares addition.is this right?Based on this I found TERP in the qustion 4. I do not know my approach in the question is right to find it or not but the question does not ask itself to find TERP. I solved all these two questions and there was not any problem but for analysis I would like to know it.
Thanks in advance
But what is it you want to know? You say that you have agreed with the answer so I don’t understand the problem.
Please do not expect me to type out all my lectures here 🙂
In the question 31, ex-div market price per share has been given and therefore TERP can be found but in the question 4 the ex-div market price per share has not been given and I would like to know that did I calculate it correctly and did i find TERP correctly?
I do not expect from you you type the whole lecture here I just wrote both question for comparison.
In question 4 there is no rights issue and therefore no TERP.
Rights issues are issues of shares to existing shareholders. This is an issue of new shares to new shareholders.
Dear Tutor, I found et us find ex-dividend market price per total shares=1600000*(1.03)/0.09-0.03=27466667
Ex-dividend market price per share=27466667/10000000(existing shares number)=2.75$I found here current ex div market price per share by dividend valuation method then I calculated TERP. I would like that is this possible to find it in this way?
But that is what the examiner has done in his answer, so of course it is possible (except that as I replied before, it is not the TERP because there is no rights issue!!!)
Yes it is not right issue share price,it is a form of placing or initial public offer and i think it is placing as it is much cheaper than initial public offer because now I read it carefully but anyway.
Usually right issue share price is given discount on current market share price but in this example what I confused is that I took total dividends of 1600000(1.6mln) multiplied it by (1+0.03) divided it into cost of equit of 0.09(9%)-growth rate of 0.03 (3%) and found current ex dividend market share in total which is 27466667 and divided it into existing shares of 10 milion(5000000/0.50$)=and found current market share price 2.75 $
given new share price of 2.50$ is still below 2.75$(current market price per share)-As i mentioned above if it is cheaper initial public offer and its price is below current market share price then it proves that it is placings not IPO.
Understood now.
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