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1. 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 the shareholder need to take up so as to have no net cash flow resulting from the issue?
1.17.72%
2.20%
3.19.48%
4.16.67%
The correct answer 19.48%.
But someone can help me to show working please. ThanksYou need to watch the free lecture on this because I work through an almost identical examples.
Our lectures are a complete course for Paper F9 and cover everything you need to be able to pass the exam well.
The theoretical ex rights price is ((5 x $4) + $3.10) / 6 = $3.85 per share.
Suppose someone currently owns 1000 shares (any number will do but 1000 is easy to deal with). They are currently worth 1000 x $4 = $4,000.
For them to have no gain no loss, they must still be worth $4,000 in total after the rights issue.
So after the rights issue, they must own 4,000 / 3.85 = 1038.96 shares, which is 38.96 more than before.
They were entitled to buy 1/5 x 1,000 = 200 shares.If they actually took up 38.96, then it means they took up 38.96/200 = 19.48% of what they were offered.
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