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Chapter 15

4.2 Rights issues

More expensive than internally generated funds but cheaper than a new issue.

Shareholders can sell their rights instead of taking them up.

Issuing new shares at a discount will cause the share price to fall.

Theoretical ex-rights price (TERP)

Market value of shares already in issue + proceeds from new share issue

TERP = ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
number of shares in issue after the rights issue

Question 1

TERP

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.

Calculate the TERP.

MV of shares currently in issue = 5m × $10.50 = $52.5m

Number of new shares issued = 5m/4 × 1 = 1.25m new shares.

Proceeds from share issue = 1.25m × $9.50 = $11.875m

TERP = ($52.5m + $11.875m)/(5m + 1.25m) = $10.30 per share

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