Issue costs

When calculating the TERP (Theoretical Ex-Rights Price), issue costs are not deducted.
This is because the TERP represents the price per share where there is no gain or loss to the shareholders.
However, in some questions, issue costs may be deducted when calculating the market capitalisation after the rights issue. This is done to reflect the decrease in the market value of the company due to the issue costs.

Regarding the calculation of the revised share price using the P/E ratio, issue costs may or may not be deducted, depending on the wording of the question.

In the case of Grenarp Co, issue costs were deducted to calculate the revised share price.

However, it is important to note that the impact on shareholder wealth is determined by comparing the new share price with the TERP.

Whether or not issue costs are deducted again when commenting on the impact on shareholder wealth depends on the specific requirements of the question.

When calculating the impact on shareholder wealth, you usually compare the revised share price with the TERP (theoretical ex-rights price).
The TERP represents the share price at which shareholders make no gain or loss.

But you could also consider the market capitalisation after the rights issue, which takes into account the issue costs. Depends on the question. But this is to
assess the overall effect on shareholder wealth.

The reason is inconsistency in past exams, that the wording of the questions and the specific requirements of each question may differ.

If you don’t know then state in your answer that you are ignoring issue costs and finish the question as generally the TERP calculation itself typically ignores issue costs, as it focuses on the theoretical ex-rights price.

If it goes on to ask for a valuation of the company then you would include it. For market capitalisation.