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Can you please help me with the following question?
The share price of P Plc is $4 per share. They announce a 1 for 5 rights issue at $3.10 per share. What % of rights offered to a shareholder should they take so as to have no net cashflow resulting from the issue?
Thanks
I really do suggest that you watch our free lectures, because I go through an almost identical example in the lecture!!!
The TERP is ((5 x $4) + 3.10)) / 6 = $3.85 per share
Suppose a shareholder currently owns 1,000 shares (and number will do, but 1,000 is an easy number :-))
Currently they are worth 1,000 x $4 = $4,000.
For no change in the cash, then after the rights issue they must still be worth $4,000.
Since the new share price is $3.85, it means they must own $4,000/$3.85 = 1,038.96 sharesSo they must have taken up 38.96 new shares.
They were entitled to buy 1,000 / 5 = 200 shares.
So the % they bought was 38.96 / 200 = 19.48%
(Our lectures are a complete course for Paper F9 and cover everything you need to be able to pass the exam well)
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