Hi can you please help me with this MCQ?
"the share price of CP plc is $4 per share.
they announce a 1 for 5 rights issue at $3.10 per share.
What % of the rights offered to a shareholder does teh shareholder need to take up so as to have no net cash flow resulting from the issue?"
Correct answer is 19.48%
Can you please explain how this figure is derived and what they mean by no net cashflow resulting from the issue? Is this taking the TERP into account?
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MCQ question 15
10y ago#1You have obviously not been watching our free lectures! Our lectures are a complete course for Paper F9 and cover everything needed to pass the exam well. This example is explained in our lecture on rights issues.
Correct
The TERP = ((5 x $4) + $3.10) / 6 = £3.85
If someone owned 1,000 shares before the rights issue, then they must have been worth 1,000 x $4 = $4,000.
For there to be no cash effect, they must still be worth $4,000 after the rights issue, which must been that they now own 4,000 / 3.85 = 1,038.96 shares. So they must have taken up 38.96 new shares.
There were entitled to buy 1/5 x 1,000 = 200 shares. Therefore they have actually taken up 38.96/200 = 19.48%
thank you . I'll watch the lecture again.
10y ago#3You are welcome :-)
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