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- May 1, 2015 at 7:15 am #243464
I have a question to ask:
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?
How is 19.48% being derived? Please advice.
May 1, 2015 at 8:49 am #243480I really do suggest that you watch the free lecture on this where I go through a very similar examples. (Our free lectures cover the whole of the Paper F9 syllabus)
Suppose a shareholder currently owns 1,000 shares (you can use any number you want for what follows). Then they are currently worth 1,000 x $4 = $4,000.
After the rights issue, in theory the total wealth of the shareholder (new value of shares + change in cash balance) must stay the same. (If you are unsure about this then you must watch the lecture – I cannot type out the whole lecture here).
For there to be no change in the cash balance, then the new value of their shares must stay at $4,000 in total.The new share price (TERP) is ((5x$4) + $3.10) / 6 = $3.85 per shares.
To be worth $4,000 in total, they must now own 4,000 / 3.85 = 1,038.96 shares. i.e. and extra 38.96 shares.
Since the would have been offered 1/5 x 1,000 = 200 shares, then it means the % they would have taken up is 38.96 / 200 = 19.48%
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