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value of a right per existing share

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › value of a right per existing share

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.
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  • August 9, 2021 at 4:46 pm #630916
    Nikitagarwal
    Participant
    • Topics: 153
    • Replies: 146
    • ☆☆☆

    Ques –
    Drumlin Co has $5m of $0.50 nominal value ordinary shares in issue. It recently announced a 1 for 4 rights issue at $6 per share. Its share price on the announcement of the rights issue was $8 per share.

    My answer =
    5m/0.5 = 10m shares

    10m * 8 =80m
    2.5m * 6 = 15m ( as right issue)
    total 12.5m and 95m i.e, 95m/12.5 = 7.6 ?

    but answer is sying 0.4 , please correct me where am I going wrong , thanks !

    August 9, 2021 at 5:02 pm #630922
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51541
    • ☆☆☆☆☆

    The TERP is indeed $7.60 per share.

    Therefor the value of the rights is $7.60 – $6 = $1.60 for each right.

    It needs 4 existing shares in order to get the right for 1 new share, therefore the value of the rights is 1.60/4 = $0.40 per existing share.

    It would seem that you have not watched my lectures on this and I do suggest that you do 🙂

    The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.

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