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Hi John,
I am stuck with a question on rights issue when i usually fly through these type of questions but i just cant seem how they get the answer of $0.40.
The question is:
Drumlin Co has $5m of $0.50 nominal value ord. shares in issue. It recently announced 1 for 4 right @ $6 per share. its share price on the annoucement of the rights issue was $8 per share.What is the theoretical value of a right per existing share( to 2 decimal places)?
So from my understanding if i was using the shares in issue for that company it would 10m @ $0.50 per share which is $5m and therefore 2.5m shares in rights issue at $6 per share which is 15m so total value of shares is 20m/12.5 = $1.60 TERP so value of the right is the TERP-Cost of the right = $1.60-$6=$4.40 so per existing share is $4.40/4 = $1.1??
I shall look forward to your reply.
Regards,
Shane
TERP is not the value of the rights – it is theoretical ex-rights price of the shares.
Also, the TERP is not $1.60, it is $7.60 per share. ((10M x 8) + (2.5M x 6)) / 12.5M
Given that the cost of taking up the rights is $6 per share, the value of the rights is 7.60 – 6 = $1.60 per new share, or 1.60/4 = $0.40 per existing share.
I do suggest that you watch my free lectures on this. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
Hi John,
I realise now i wasn’t using the correct share price, but my method was correct.
Thanks John!
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