Sir, can you please help me with understanding these kinds of questions where we are asked in the exam?
"How can we see the effect on the wealth of the shareholders using the rights issue funds to redeem the Bonds."
Ask the Tutor ACCA FM
Shareholders Wealth
5y ago#1The wealth of the shareholders is measured by the market value of the shares.
As I explain in my lectures on rights issues, the TERP is the theoretical value of the shares after the rights issue at which shareholders make no gain and no loss.
If it is a question where the money from the rights issue is used to repay bonds (therefore less interest to pay, therefore higher earnings, and therefore higher share price) we calculate the new share price (using a PE valuations). If the new share price is higher than the TERP then shareholder wealth has increased, if it is lower than the TERP then shareholder wealth has fallen.
Sign into reply to this topic.