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Dear Mr Moffat,
I had a point in the above mentioned question, whereby I disagree with the examiner, and need your rationale on why the figures are as the examiner has presented them:
You see we were told:
(b) Assuming the rights issue takes place and ignoring the proposed use of the funds raised, calculate:
(i) the rights issue price per share;
(ii) the cash raised;
(iii) the theoretical ex rights price per share; and
(iv) the market capitalization of THP Co. (5 marks)Now (i) and (iii) on this question are absolutely fine with me but my problem is with (ii). In other F9 sitting and even in paper F7, we always add the issue costs of the rights issue to the funds raised to consider the amount that the rights issue will raise. So why hasn’t the issue costs being considered in (ii)? According to me, the cash raised should be:
(1m*3.84)+0.32m which comes to 3840.32m (this is the approach followed in other F9 papers, F7 and even in one of the study texts it was written “add the issue costs to the rights issue, don’t forget!) So is it because we weren’t told the exact amount of funds needed to be raised, we aren’t adding the issue costs because in other papers we add the issue costs to the funds needed to be raised to find out the number of issued shares? Is it because we are getting the amount and not the shares that we don’t add issue costs?
Now in (iv) the examiner deducts the issue costs to get the market capitalization so why not just take care of them in (ii), I don’t get the rationale of deducting them in (iv) it’s not “market capitalization” or is the working of deducting a part of a formula that I don’t know? I’ve never seen it before.
Thanks,
Gabriel.
You say that you are happy with calculating the rights issue price per share, and therefore the cash that is raised.
What happens in F7 or what one of the study texts says is completely irrelevant – this question specifically says (at the start of the second paragraph) that the purchase price will be the the rights issue funds raised, LESS the issue costs of $320,000.
It may well be the case that usually we would raise more so as to cover the issue costs, but if the question specifically says different, how can you disagree with the examiners answer? 🙂
I’m sorry Mr. John but I’m not getting the point yet, what’s the reasoning behind the use of the words “less issue costs” what does that mean. Also, you said the question specifically says different, what’s specific thing is different. Because I’m really confused in F9 Dec 2009 (question 3 NG CO) this same examiner added the issue costs and here he is not so just don’t know what’s different here? And if we are not supposed to take account of issue costs (just supposed to get the gross proceeds) then why has he deducted these issue costs in the market capitalisation in (iv)?
Sorry but I just don’t get it. 🙁
The wording in the two questions is different.
In THP you are asked to calculate the amount raised – you are happy with this.
How can you then say that you raise more so as to cover issue costs?
The question has you work out the amount raised, and tells you that the amount invested will be the amount raised less the issue costs.In NG, the question tells you how much equity finance is needed. It is to be raised by a rights issue, but because we know how much we need to be left with, the amount we need to raise must be higher to cover the issue costs. It we did not raise more, then after issue costs we would not have the amount we need.
In THP it effectively says that the amount we need (for the purchase price) will be the amount raised less the issue costs.
I realise that the wording may seem confusing, but the wording is different between the two, and what the examiner has done is correct in both cases.
However, do not panic. Although if you read it different and got a different answer as a result, you would lose marks but it would only be a few marks! The examiner and markers are very fair – most marks are for proving that you understand what is happening (there are very few marks for getting a ‘correct’ answer), and they are sensible enough to realise when the wording of the questions has caused problems – there are regular meetings during the marking process to discuss where people are making mistakes and where relevant (such as wording that may be confusing) they adjust the marking accordingly.
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