Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Rights Issues and TERP Caculations
- This topic has 1 reply, 2 voices, and was last updated 6 years ago by John Moffat.
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- November 12, 2017 at 4:13 pm #415429
Hi Sir
I’ve worked through a number of past papers and have found that the solutions for solving TERP calculations are variable.
In some, the solution is arrived by:
‘[Total MV of exisiting shares + (Funds Needed, inc. issue costs) – Issue Costs] / Ex Rights Qty of Shares’
Whereas others use: ‘[Total MV of exisiting shares + (Funds Needed, inc. issue costs)] / Ex Rights Qty of Shares’
i.e. the issue costs are not always deducted when arriving at the TERP.
In the June 08 paper (THP Co, Question 2b) the solution ignores the issue costs when deriving the TERP figure,k but then deducts the issue costs when arriving at the market capitalisation figure.
In the June 09 paper, NG Co, the solution ignores the issue costs when deriving the TERP.
Is there a way to differentiate when a TERP calculation requires a deduction of the issue costs and when it does not?
Separately, could I please ask about the rationale very briefly (also) to help me attach meaning to what I’m doing. From your lectures, my understanding is that any subscription to a rights issue entitlement, would have no impact on a shareholder’s wealth because whatever the shareholding wealth increases by (due to increased shareholdings) their cash balance (cash element of their wealth) decreases by (in theory)…. And so, is the process of deducting the issue costs from the funds raised, designed to demonstrate that this element of shareholders’ funds, did not add value to the company’s worth and so effectively, issue costs ware always deducted from the market capitalisation figure because this element of the cash proceeds taken from shareholders did not increase the company value, which therefore means that any extent of issue costs, will always lead to a given degree of erosion of shareholder wealth (ALL else being equal)?
Thank you for reading, sorry for rambling.
November 13, 2017 at 9:33 am #415499You must not post links to pirate website – they are illegally in breach of the ACCA copyright. I have all the past papers and so all you need to is state the exam and question number. (And you should not be using pirate website to find questions – you should buy a Revision Kit from one of the ACCA approved publishers. Not just because they legally reproduce question, but importantly because both the syllabus and the format of the exam have changes over the year. The Revision Kits include questions that are up-to-date for both syllabus and format).
The TERP is the theoretical price and ignore things like issue costs. Any extra costs will reduce the value of the company (whether to do with a rights issue or not).
In the June 2009 question there is no mention of any issue costs and so it is therefore impossible to take them into account! The question is simply asking for the TERP in the normal way (the fact that it says that the major expansion has not yet begun confirms this – as I explain in the lecture, what they do with the money raised will also affect the share price).
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