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the share price of CP plc is $4 per share
they announce a 1 for 5 rights issue at $ 3.10 per shareWhat percentage of the rights offered to the shareholder does the shareholder need to take up so as to have no net cash flow resulting from the issue?
In future, you must ask in the Ask the Tutor Forum if you want me to reply – this forum is for students to help each other.
It seems that you have not watched the free lectures, because I go through an almost identical example in the lecture!!
Suppose a shareholder currently owns 1,000 shares (and number will do – the final answer will be the same). They are currently worth 1,000 x $4 = $4,000 in total.
As you will be aware, in theory the total wealth (shares together with the change in the cash balance due to taking up rights and selling rights) will remain unchanged at $4,000.
For there to be no change in the cash balance, their shares must be worth $4,000 in total.I assume that you are able to calculate the TERP, which is ((5x$4.00)+$3.10) / 6 = $3.85
Therefore after the rights issue they must hold 4,000/3.85 = 1,038.96 shares (38.96 more than before).
The rights issue entitled them to 200 shares (1/5 x 1,000), and therefore they must have taken up 38.96/200 = 19.48% of the rights (and sold the remaining 80.52%).
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