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The share price of CP plc is $4 per share.
They announce a 1 for 5 rights issue at $3.10 per share.what % of the rights offered to a shareholder does the shareholder need to take up so as to have no net cash flow resulting from the issue?
A) 20.00%
B) 19.48%
C) 17.72%
D) 16.67%(i do not understand the question) please help me sir
Again you should watch our free lecture because they go through a very similar example. (Our lectures are a complete course for F9 and cover everything you need to pass the exam well).
The TERP is ((5 x $4) + $3.10 ) / 6 = $3.85.
Suppose someone currently owns 1000 shares (and number will do).
Before the rights issue they are worth $4,000.For no cash effect they must still be worth $4,000 after the rights issue, which means they must own $4,000 / $3.85 = 1038.96 shares, 38.96 more than before.
They were entitled to take up 1/5 x 1000 = 200 shares. Since they only took up 38.96 shares, it means they will have taken up 38.96/200 = 19.48%
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