Theoretical value of rights

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February 26, 2017 at 2:23 pm #374329
Oladipo
Participant
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Hi John,

I came across this question in sept 2016 past question number 15.

Drumlin co has $5m of $0.5 nominal value of ordinary shares in issue. It recently announced a 1for 4 rights issue at $6 per share. Its share price on the announcement of the rights was $8 per share. What is the theoretical value of a right per existing share?

I calculated it this way:

4@8=32
1@6=6
— —
5. 38

38/5= 7.6 theoretical ex right price

New MV $7.6
Cost of taking up the right ($6)
—–
1.6 Value of right.

Please am I correct as the answer says
0.4 or what did I do wrongly?

Thanks
February 26, 2017 at 3:11 pm #374358
John Moffat
Keymaster
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You are correct so far as you have gone – the value of a right is $1.60.

However the question asks for the value “per existing share”.
So since it needs 4 shares to get 1 right worth $1.60, the value per existing share is $1.60/4 = $0.40.

I do suggest you watch my free lectures on this because I do mention the two ways of giving the value. The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.

(Incidentally, there are also lectures uploaded working through the whole of this exam. You can find them linked from this page:

https://opentuition.com/acca/fm/acca-fm-revision-lectures/ )
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