Page 504 - FM Integrated WorkBook STUDENT 2018-19

Chapter 21

Question 2

TERP

Jones Co, which has an issued share capital of 3 million shares each priced at
$6.70, makes a 2 for 3 rights issue at an issue price of $6.10.

Calculate the TERP.

MV of shares currently in issue = 3m × $6.70 = $20.1m

Number of new shares issued = 3m/3 × 2 = 2m new shares.

Proceeds from share issue = 2m × $6.10 = $12.2m

TERP = ($20.1m + $12.2m)/(3m + 2m) = $6.46 per share

Question 3

Value of a right

Hicks Co, which has an issued share capital of 5 million shares each priced at
$10.50, makes a rights issue of one new share for every 4 currently in issue.
The issue price is $9.50 and the TERP is $10.30.

Calculate the value of a right and the value of a right per existing share.

Value of a right = $10.30 – $9.50 = $0.80.

Value of a right per existing share = $0.80/(4/1) = $0.20

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