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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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