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According to example 1 of your notes of rights issue. Is it correct that:
1) The TERP of $4.60 is the New Market Value of all the shares including the rights shares issue, which means that if we sell our shares in the market we will get $4.60 for each shares.
2) Rights issue cost of $3 is the amount that shareholders have to pay for each new share if they take up the rights shares.
3) If any shareholder does not take rights share then if they sell their shares they would get $4.60 in the market BUT if they take up rights shares then if they sell their shares they would get $1.60 for each of rights shares BUT how much do they get for their ordinary shares?
1. Yes – that is the new market value of all the shares.
2. Yes.
3. There is no difference between the new shares issued and the already existing shares – they are all the same and have the same market value. If someone does not want to take up the rights then they can sell the rights letter to someone else.
I do explain all of this in my free lectures!
It seems as though maybe you are using the notes without watching the lectures. If this is the case then that is pointless. They are lecture notes (not a Study Text) and it in the lectures that I explain and expand on the notes. If you are not watching the lectures for any reason then it is essential that you buy a Study Text from one of the ACCA Approved Publishers and study from there. You will not pass the exam just using the lecture notes without watching the free lectures that go with them.
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Sir, I have seen ur lecture on this topic but I still have not understood few things which are important to be cleared:
1) TERP of $4.60 that u have calculated is the market price of all the shares (ordinary shares & rights shares) after the rights shares issue and if someone does not want to take up the rights then they can sell the rights letter to someone else on the price of $1.60 which is called the value of the rights [true?]
2) If shareholders are paying $5 for the ordinary shares, if they sell their ordinary shares [without rights share] in the market to anybody else then how would they earn gain on the sale of the ordinary shares? Is it true that if they get more than $5 in the market they would be ready to sell off their shares while anything less than $5 is not a good option [true?]
3) Sir, there is a question called MFZ Co (June 2014) where the issue cost of $200,000 would have to be met from the cash raised is included in the calculation of TERP. I am confused with the calculation of TERP, do we subtract the issue costs when calculating the TERP or not?
I have attempted two different questions from past papers called NG Co [Dec 2009] & MFZ Co [June 2014]:
NG Co Dec 2009 (Q3)
Issue costs were not deducted from the calculationMFZ Co June 2014 (Q4)
Issue costs were deducted from the calculationHope you could help me on this 🙂
1. Correct.
2. If they choose to sell their shares (which they obviously do not have to) without taking up the rights, they will lose $0.40 per share (so a total of $1.60). However they will have sold the rights for $1.60 so end up overall with no gain or no loss.
3. It depends on the wording of the question. However the treatment here is the same in both questions. In NG they need $5M for the investment, the issue costs are $312,000 and therefore they are raising $5,312,000 from the rights issue.
In MFZ they need $9.2M for the investment, the issue costs are $200,000, and therefore they are raising $9.4M from the rights issue.
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