- June 7, 2020 at 11:26 am
here is the question:
Marcoli Co has produced the following net profit figures for the years ending 31 December.
(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.
1 new share for each 5 outstanding (100,000 new shares in total)
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.
Calculate the EPS for 20X6, 20X7 and 20X8.
here is the 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
No shares outs tan ding prior to exercise + no shares issued in exercise
($11.00×500,000) + ($5.00×100,000)
Computation of EPS
20X6 EPS as originally reported
20X6 EPS restated for rights issue
$1100,000/*10/11 (or 2.20x 10/11)
20X7 EPS including effects of rights issue
$1500,000/ (500,000×2/12×11/10)+ (600,000×10/12)
I have an issue with the calculation of theoretical ex-rights:
I calculated this as the same method use in the lectures
but as you see in the answer the computation is different. Can you help?June 12, 2020 at 4:30 pm
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.
You must be logged in to reply to this topic.