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I am unable to get to the correct answer for the below, could you please explain?
Drumlin Co has $5m of $0.50 nominal value ordinary shares in issue. It recently announced a 1 for 4 rights issue at $6 per share. Its share price on the announcement of the rights issue was $8 per share.
The answer is TERP $1.60
I cannot get this answer.
Many Thanks
Consider someone currently owing 4 shares. They are worth 4 x $8 = $32.
They buy 1 more share for $6.
They therefore end up with 5 shares which will be worth 32 + 6 = $38.Therefore the TERP is 38/5 = $7.60.
What the question is probably asking for is not the TERP but the value of the rights, and the value of the rights is 7.60 – 6 = $1.60.
All of this is explained in detail in my free lectures. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
Thank you very much for this reply, now makes much more sense. I will watch your lectures
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