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Hello Sir. This question was asked in another thread but I could not asked you there so I asked here! hope u don’t mind.
[Question]
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?
[Answer]
Sir, I could not understand how the examiner has calculated TERP & rights issue price. Please help me with this!TERP = (4 x $7) + x / 5
How can I calculate x when I don’t know the TERP?TERP—————x
Right cost———-x
Value of rights—-$1.60I have calculated value of rights of 1.60 which was not a problem BUT calculating TERP & right cost is difficult.
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 ?
Sorry sir but I am still unable to calculate using your technique 🙁
if we assume that x is $5 then it would be:
then TERP = (4 x $7) + (1 x $5) / 5 = 6.6
TERP = 6.6
rights cost = 5
Value of rights = 1.60Is that what u meant? Can you please clarify what you meant by IF two equations equal to each other?
It is using simple algebra,
I wrote two equations for the TERP. They must be equal to each other, so:
((4 x $7) + X) / 5 = 1.60 + X
(28 + X) / 5 = 1.60 + X
Multiply both sides by 5,
28 + X = 8 + 5X
Subtract 8 from both sides
20 + X = 5X
Subtract X from both sides
20 = 4X
Therefore X = 20/4 = $5.
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