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share valuation- Rights issue

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › share valuation- Rights issue

  • This topic has 3 replies, 2 voices, and was last updated 7 years ago by John Moffat.
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  • Author
    Posts
  • November 24, 2015 at 3:09 pm #284917
    munya76
    Member
    • Topics: 2
    • Replies: 2
    • ☆

    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

    November 24, 2015 at 4:11 pm #284940
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51571
    • ☆☆☆☆☆

    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 shares

    So 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)

    November 27, 2015 at 10:27 pm #285818
    munya76
    Member
    • Topics: 2
    • Replies: 2
    • ☆

    Thanks!

    November 28, 2015 at 8:23 am #285849
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51571
    • ☆☆☆☆☆

    You are welcome 🙂

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