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Financing – Equity finance
Example 2
Plover Co has 1 million GBP 1 ordinary shares in issue quoted at GBP 4.50
ex div. It is considering a 1 for 5 rights issue at GBP 4.20 per share.
Required:
(a) Calculate the TERP, and the change in wealth of a shareholder who
held 10,000 shares before the issue.
Assume that Plover Co intends to use the funds raised to finance a project
with an NPV of GBP 300,000.
Required:
(b) Recalculate the TERP, and the change in wealth of a shareholder
who held 10,000 shares before the issue.
Solution
(a) TERP = [(N × cum rights price) + issue price]/(N + 1)
= [(5 × GBP 4.50) + GBP 4.20]/(5 + 1) = GBP 4.45 per share
Wealth of the shareholder:
Pre issue = 10,000 shares at GBP 4.50 each = GBP 45,000
Post issue: Investor received 2,000 shares paid for at GBP 4.20 each so
now has 12,000 shares:
Wealth = (12,000 shares × GBP 4.45) – (2,000 × GBP 4.20) = GBP
45,000
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