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Good Morning Sir,
This is a ACCA Study Hub question, the part where they have 5 x 2.8 shouldn’t that be 1 x 2.8?? why do they used 5
also, can you say if their calculation is correct?
1)A company currently has 10m $1 shares in issue with a market value of $3 per share. The company wishes to raise new funds using a 1-for-4 rights issue. The theoretical ex rights price per share is $2.80.
How much new finance was raised by the rights issue?A.$2.5m
B.$4.0m
C.$5.0m
D.$7.0mThe correct answer is C.
4 × $3.00 = $12.00
5 × $2.80 = $14.00
Therefore, the offer would have been $2.00
Finance raised ?$2.00 * $10m/4 = $5m
Hi,
The answer is correct based on the information given. It is an odd question as we are working backwards from the TERP to calculate the issue price, which we don’t usually do. In EPS questions we are usually required to calculate the TERP.
We currently have 4 shares at $3 market value, and then there will be 5 shares in total following the issue (4 old plus 1 new share) at £2.80 each. The 4 shares are worth $12 and the 5 shares are worth $14, meaning that the one share issued will have been issued at the difference between the two of $2.
This can then be used to work out the total amount of finance used.
Hope that helps.
Thanks
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