Page 278 - Microsoft Word - 00 ACCA F9 IWB prelims 2017.docx

Chapter 15

4.3 Value of a right

As a rights issue gives the opportunity to buy shares at a discount, the right itself has
value and can be sold on.

Value of a right = TERP – issue (subscription) price

Value of a right per existing share = (TERP – issue price)/no. of shares needed to
obtain a right

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

270