Skip to content
Sign inRegister

Ask the Tutor ACCA FM

THP Co

CCarl2y ago
Sir I have a doubt regarding this question. In part B where they ask to calculate the TERP, the solution is given as follows: Market capitalisation after rights issue = 14·4m + 3·84m = $18·24 – 0·32m = $17·92m. The issue costs result in a decrease in the market value of the company and therefore a decrease in the wealth of shareholders equivalent to 8c per share (where they have deducted the issue costs from the market capitalisation which I understand.) However, in part D, to calculate the market capitalisation after acquisition: Price paid for CRX Co = 3·84m – 0·32m = $3·52m Market capitalisation = 17·92m + 3·36m – 3·52m = $17·76m This is equivalent to a share price of 17·76/4 = $4·44 per share My question: Why do we deduct issue costs of $0.32m two times? One when calculating the market cap after rights issue and second after the acquisition. Thank you very much!
IAW3005IAW3005Tutor2y ago#1
For starters this question is nearly 15 years old I will endeavour to give you an answer that will meet with your approval tomorrow
IAW3005IAW3005Tutor2y ago#2
In the first situation you are calculating the market cap, ignoring the use of funds, assuming the rights issue take place. So you have to deduct the issue costs, this has to be paid, think of it as an admin charge , then this will result in a decrease in the market value of the company share Then the next part of the question looks at a semi strong environment, so public information, post acquisition. You then have to calculate the market capitalisation of THP + CRX less the price paid for CRX since this cash has gone. Market capitalisation after rights issue.m = 14·4 + 3·84 = $18·24 – 0·32 = $17·92 You are happy? The fees are deducted from the value here as they have to pay the issue costs Market capitalisation m $17·92 + $3.36 - $3.52( 3.84 -0.32) = $17.76 This is because THP have paid 3.52 for CRX , the other amount is fees. THP has therefore paid 3.84 for something that is only worth a contribution of 3.52. so what will CRX add to THP, a value 3.36 (so your paying 3.52 for something that is worth 3.36) So the valuation is falling by 0.16 to 17.76
CCarl2y ago#3
Thank you so much!
IAW3005IAW3005Tutor2y ago#4
Your welcome
Sign into reply to this topic.