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The share price of CP PLC is $4 per share.
They announce a 1 for 5 right issue at $3.10 per share.What % of rights offered to a shareholder does the shareholder need to take up so as have no net cash flow resulting from this issue?
Correct answer is given as 19.48 %Please can you help with this question as I have no idea how to answer it.
You really should watch the free lectures, because this is covered in the lectures. (The lectures form a complete course for F9 and cover everything needed to be able to pass well.)
The theoretical ex-right price is ((5 x $4) + $3.10) / 6 = $3.85 per share.
Suppose someone originally held 1,000 shares (any number will work). The person was therefore originally worth 1,000 x $4 = $4,000.
They must still be worth in total $4,000 after the rights issue, and if there is no net cash flow it means their shareholding must be worth $4,000.
Since the new share price is $3.10, it means they must own 4,000/3.85 = 1038.96 shares after the issue, which is 38.96 more than before.
They were entitled to take up 1/5 x 1,000 = 200 new shares.Therefore they must have taken up 38.96/200 = 19.48% of what they were offered.
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