- This topic has 7 replies, 2 voices, and was last updated 3 years ago by
.
- Posts
Amazon plc has ordinary shares in issue and the company have decided to make a one-for-four rights issue at 40% discount. The current market value of each share is $8·00.
What will be the theoretical value of the rights attached to each original share?
answer = $0.8
I got $0.64, where did i go wrong?
The new shares will be issued at 60% x $8.00 = $4.80 per share.
Therefore the TERP = ((4 x $8) + $4.80) / 5 = $7.36
Therefore the value of the rights for each new share is $7.36 – $4.80 = $2.56
It needs 4 existing shares to get 1 new share, so the value per existing share = 2.56/4 = $0.64
Have you watched my free lectures on this? The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
thank you sir, btw I want to ask. under dividend growth model, if there is 2 dividend growth, how to calculate ke?
example, the dividend growth is 4% per year is expected to be for the forthcoming year and the dividend growth is expected to be at a rate of 2% per year for the subsequent years.
So, it will be…
Lets say. d0 is 20 cents, P0 is $4.20.
so it will be(0.2(1+4%)/420)+2%
is my workings correct? if yes, why g is different?
You could not be asked to calculate Ke in the exam in that situation.
You could be given Ke and be asked to calculate the market value. In that case you would calculate the PV of the dividend in 1 years time. You would then use the growth formula on the dividends then growing at 2% and discount the result for 1 year because the growing dividend starts at time 2 instead of time 1.
I work through examples of this in my free lectures.
(Although you could not be asked to calculate Ke in this situation in the exam, you would have to calculate the IRR of the flows).
Sandra Co has recently announced after-tax profits of $12 million and has a market capitalisation of $60 million. The company expects profits to increase by 25% for the forthcoming year but then to increase at the much lower rate of 4% per year in subsequent years. The company will maintain a constant dividend cover of 1·5 times throughout.
Which ONE of the following is the predicted rate of return from the ordinary shares?
answer: 20.7%
Is this the same example like I explain or different?
Btw, i cannot seem to get it if i use div valuation model.
This is how i get
ke = (8m x 1.25)/60m + 4%is it correct? if yes, why g is different for both figure?
In future you must start a new thread when you are asking about a different topic – this question has nothing to do with TERP.
The dividend next year will be (12 x 1.25) / 1.5 = 10M, and from then on it will increase at 4% per year.
Therefore the cost of equity = 10/60 + 0.04 = 0.207 (or 20.7%)
(In the formula we usually use Do(1+g) as the numerator, but that is the same as the dividend in 1 years time and here we know that the dividend is $10M in 1 years time and so we do not need to multiply it by (1+g) )
- The topic ‘Terp’ is closed to new replies.