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Hope you are well……
I need to know, do we have to subtract issue cost from theoritical ex rights per share? If yes, then in part (d) it asks what would happen if the company doesn’t announce after tax net savings after acquisition.
The answer says:
Price paid for CRX: 3.84 – 0.32 (issue cost) = $3.52
Market capitalisation = 17.92 + 3.36 – 3.52 = 17.176My question is, in calculating the figure 17.92 that is actually market capitalisation after rights issue, we already decucted issue cost, but as the question says the purchase price is funds raised less issue cost (3.84 – 0.32 = 3.52), isn’t issue cost incorporated twice? Why do we subtract issue cost from TERP?
Thankful in advance….
You are confusing two separate things.
The theoretical ex rights price is ignoring anything that the company does with the money raised. If shareholders think that the money raised is invested well then the actual share price will be higher, if they think it is invested badly then the actual share price will be lower.
Here, the company is investing all of the money raised and is getting something worth less than the money invested, which brings down the market value.
However, they are not counting the issue costs twice – they could have told you that they were only using $2M of the money to buy something worth $2.5M and in that case the market value (in total) would increase by $0.5M.
(But obviously they are more likely anyway to be intending to use all of the money raised!)
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