section B q4 – rights issue

The question didn’t say we should calculate the TERP.

BPP calculated it in that question because it was a requirement of the question.

Calculating the TERP will not help in calculating the change in wealth of the shareholders. A rights issue will always leave their wealth unchanged.

Olanrewaju, go and get some life bro!

You calculate terp and then you calculate the revised share price and then you compare them.

Yazan:

Although you would not lose marks for calculating an ex-rights price (provided that you also carried on and looked at the effect of relying the loan), you were not asked to.

What olanrewaju said was correct. The theoretical ex-rights price ignores what the company is doing with the money raised and therefore assumes that shareholders overall will make no gain / no loss. The only reason that there may be a gain to shareholders (which is what was asked for in this question) is because the money raised is being used well – in this case to repay loans, therefore save interest, therefore increase profits.

That is what this question was testing, and that is why the PE ratio was given.

To refer to the ‘BPP way of doing it’ is nonsense. There is only one way of calculating the TERP and if that had been what was required I would have done it in my answer. This question was not testing TERP – it was testing the understanding of why a rights issue might end up increasing shareholders wealth (which the TERP itself will not).