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need help with a question

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › need help with a question

  • This topic has 1 reply, 2 voices, and was last updated 4 years ago by P2-D2.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • June 7, 2020 at 11:26 am #573042
    farhaanm
    Participant
    • Topics: 165
    • Replies: 73
    • ☆☆☆

    Hello

    here is the question:

    Marcoli Co has produced the following net profit figures for the years ending 31 December.
    20X6
    20X7
    20X8

    $m
    1.1
    1.5
    1.8

    (note each correspond to the years above but had to type it this way)

    On 1 January 20X7 the number of shares outstanding was 500,000. During 20X7 the Company announced
    a rights issue with the following details.
    Rights:
    1 new share for each 5 outstanding (100,000 new shares in total)
    Exercise price:
    $5.00
    Last date to exercise rights:
    1 March 20X7
    The market (fair) value of one share in Marcoli immediately prior to exercise on 1 March 20X7 = $11.00.

    Required
    Calculate the EPS for 20X6, 20X7 and 20X8.

    here is the answer:

    Answer
    Computation of theoretical ex-rights value
    This computation uses the total fair value and number of shares.
    Fair value of all outs tan ding shares + total received from exercise of rights
    divide by
    No shares outs tan ding prior to exercise + no shares issued in exercise

    ($11.00×500,000) + ($5.00×100,000)
    divide by
    500,000+100,000
    = $10.00

    Computation of EPS

    20X6 EPS as originally reported

    $1100,000/500000

    20X6 EPS restated for rights issue

    $1100,000/*10/11 (or 2.20x 10/11)
    500,000

    20X7 EPS including effects of rights issue

    $1500,000/ (500,000×2/12×11/10)+ (600,000×10/12)

    20X8

    EPS=$1800,000/600,000

    I have an issue with the calculation of theoretical ex-rights:

    I calculated this as the same method use in the lectures

    1@$5
    5@$11
    then

    $16/6=2.5

    but as you see in the answer the computation is different. Can you help?

    June 12, 2020 at 4:30 pm #573676
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7149
    • ☆☆☆☆☆

    Hi,

    We currently have 5 shares at $11 and receive 1 new share for $5, so there are 6 shares no in issue with a combined worth of $60 ([1×5] + [5×11]). This then gives a TERP of $10 ($60/6).

    The fraction is then 11/10 (price before/TERP).

    Hope that clears it up for you.

    Thanks

  • Author
    Posts
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