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Chapter 20
CHAPTER 1 – LONG TERM FINANCE
Example 1.1
Bowie Co has 1 million $1 ordinary shares quoted at $3.20. It is considering a
1 for 3 rights issue at $2.20 per share.
Required:
Calculate the theoretical ex-rights share price.
Answer = $2.95
Workings
The theoretical ex rights price (TERP) is:
= [(3 × $3.20) + (1 × $2.20]/4 = $2.95
Alternatively, TERP can be calculated by looking at the total value of all the
shares as follows:
(1m × 3.2) + ((1/3 × 1m) × 2.2)
––––––––––––––––––––––––– = $2.95
1m + (1/3 × 1m)
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