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Shareholder wealth

IIlham5y ago
Hi, sir in questions where we are told that the current P/E ratio will remain the same and we calculate the revised the share price using the new EPS, why do we calculate the decrease or increase in shareholder wealth as revised share price - TERP. I don't understand the logic, I thought comparing the new share price with the old share price would make more sense. Also, would the new shareholder wealth be calculated using the revised share price or the TERP?
John MoffatJohn MoffatTutor5y ago#1
The TERP is only of relevant when there is a rights issue. After the rights issue the market value per share of all the shares is lower, but shareholders own more shares. In theory the total wealth of the shareholder (i.e. number of shares x price per share, less the amount paid to take up the rights) will stay the same. In practice, the actual share price after the rights issue is likely to be higher than the TERP because usually we will be expecting the money raised to have been invested well by the company. I explain all of this in my lectures on rights issues!!!!
IIlham5y ago#2
Sir, I mean like for example in the kit (Question: Bar Co) after the rights issue will we calculate the total shareholder wealth using the TERP or the new share price we calculate using the P/E ratio x EPS for the new share price?
John MoffatJohn MoffatTutor5y ago#3
The TERP is the new value of the shares for the shareholders to make no gain and no loss. It is ignoring what the company does with the money raised. If it is invested well, then the share price will end up being higher than the TERP (and therefore the shareholders will make a gain) whereas if shareholders think the money is invested badly then the share price will end up being lower than the TERP. In this question we can calculate the TERP - the share price at which shareholders make no gain and no loss. We also have information to calculate the actual new share price (using the PE ratio). If the actual new share price is higher than the TERP then shareholders make a gain. If the actual new share price is lower than the TERP then shareholders will be making a loss.
IIlham5y ago#4
Oh ok, that makes sense. Thank you :)
John MoffatJohn MoffatTutor5y ago#5
You are welcome :-)
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