Good afternoon Sir,
in the first example we are given the scenario whereby a rights issue is given to shareholders at a price of £3 per share purchased.
Do we use 4 shares in our workings because this is the amount you would need to hold in order to get a rights issue?
I hope you understand what I have written, apologies if I am not clear but I am hoping you know what I mean.
So for instance, if the rights issue was 3 for 1.
would our calculation be 3 shares @ £4 each giving a value of £12
and then the calculation for the rights issue underneath?
Many thanks in advance.
Chris.
Ask the Tutor ACCA FR
Chapter 21 - Example 1
Sir I am also struggling to understand example three... I understand the workings but I do not understand the theory behind it.
Why are we only allowing for 600,000 of the shares? The 600,000 being £12M divided by the mid-market price and then that is the difference of the original share capital?
I have read over the question and looked at the answer but can't seem to understand or get the logic... What am I missing?
"The 600,000 being £12M divided by the mid-market price" er, no! $12,000,000 divided by mid-market price is 2,400,000 shares
2,400,000 deducted from the 3,000,000 options gives you the 600,000
What we are saying is that 3 million @$4 is the equivalent of 2.4 million @ $5 plus 600,000 FREE shares
And it's those free shares that are the diluting shares
Better?
No!
"So for instance, if the rights issue was 3 for 1.
would our calculation be 3 shares @ £4 each giving a value of £12
and then the calculation for the rights issue underneath?"
A 3 for 1 rights issue would have the top line as 1 share, mid market price, total value of 1 share (This is 3 for 1 - unusual - it would normally be 1 for 3)
Next line 3 shares, exercise price, total cost of the extra 3 shares
Third line , now have 4 shares with a total value of $xxxx
So each of those 4 shares is theoretically worth $yyy
Get your head round that and get back to me if you need to
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