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In the solution the examiner has compared the expected share price with TERP.
I want to know why is it that way? The question is clearly asking the effect of european investment. Shouldnt that be compared with the current share price which is $4.00.
What i understood is that $4.00 would be compares with revised share price which is $4.18 but the examiner compared it with TERP.
The equity finance via right issue has been used for european investment any comparison should be done be right issue not after it if i am not wrong?
The examiner is correct to compare with the TERP.
The TERP is what the share price would be ignoring what the company is doing with the money raised.
At the TERP, shareholders would be making no gain and no loss (a lower price per share, but they have more shares bought ‘cheap’). This is what the share price would be if there was no gain and no loss from the new investment.Since the actual share price ends up being higher than the TERP, the difference is due to the effect of the way the money raised as been invested.
Thank You for your reply Sir.
Actly i was getting bit confused on the words of the question ‘ Effects of european investment’ I thought we would take into account of how the money is being raised for the investment.
But we are always concerned with the return we get from the investment.
As per my understanding there are 3 stages for share price.
1. First the current share price
2. Terp. The share price we get after raising finance and not concerned with the returns from investment.
3. the revised share price we get after investing and getting returns from it.
We always compare it with the returns we get from it and share price after raising finance. Am i right?
The only bit confusing part here is that we are raising finance only due to this ‘European Investment’ Why that is not taken into account when comparing?
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