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Hello John
Simon Co is planning a 1 for 4 rights issue. The value of rights has been calculated as
$0.40 per existing share. Simon Co’s market price is currently $7.00 per share.
What is the theoretical ex rights price (TERP) per share and the rights issue
price per share?1. Please help to obtain the answer. Having some difficulties to understand the examiners report.
Thanks
Given that the value of the rights is $0.40 per existing share, then the value of the rights for each new share will be 4 x $0.40 = $1.60. This will be the difference between the TERP and the cost of taking up each right.
You should obviously be happy using basic algebra and so the easiest way of solving the question in my opinion is the following:
If the cost of taking up the rights is X, then the TERP = ((4 x $7) + X)/5.
We know that the TERP – X = $1.60, so TERP = 1.60 + X
If you make the two equations for the TERP equal to each other, then you can calculate X and you can then easily calculate the TERP 🙂
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