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Sir I want to confirm as per your Note Right issue is just a theoretical concept – a very small topic however in the study material it is quiet extensive. As per your experience , were there any practical questions asked in past on it ?
Yes, it is very often asked practically.
The TERP is what the share price will be in theory after the rights issue. As I state in my free lectures, the actual share price after the rights issue will probably be higher than the TERP. The reason is that the company is raising more money and it the money is being used to invest in a new project or is used to reduce borrowings (and therefore the interest to be paid), then this will affect the share price.
Quite often in the exam you have been asked to calculate the TERP (the share price where there is no gain no loss to the shareholders), and then to calculate the new share price using PE ratios, and then to compare the two. If the new share price is higher than the TERP then the company is using the money raised well. If the new share price is lower than the TERP then shareholders are worse off and what the company has done is not sensible.
You should find there are several questions of this type in your Revision Kit.
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