ExpertEasy2 marksMultiple Choice
ACCA · Question 08 · Business Finance
Section A
Nordic Timber PLC, a cross-border multinational, is raising capital via a 1-for-4 rights issue. The current market price of the shares is $4.50. The issue price for the new shares is set at $3.00.
What is the Theoretical Ex-Rights Price (TERP) per share?
Section A
Nordic Timber PLC, a cross-border multinational, is raising capital via a 1-for-4 rights issue. The current market price of the shares is $4.50. The issue price for the new shares is set at $3.00.
What is the Theoretical Ex-Rights Price (TERP) per share?
Answer options:
A.
$3.75
B.
$4.13
C.
$4.20
D.
$4.50
How to approach this question
Calculate the total value of the shares required to get a new share (cum-rights price × number of existing shares needed). Add the cost of the new share. Divide the total value by the total number of shares (existing + new).
Full Answer
C.$4.20✓ Correct
To calculate TERP:
Value of 4 existing shares = 4 × $4.50 = $18.00
Value of 1 new share = 1 × $3.00 = $3.00
Total value of 5 shares = $21.00
TERP = $21.00 / 5 = $4.20 per share.
Common mistakes
Dividing by 4 instead of 5, which gives $5.25 (incorrect logic).
Practice the full ACCA FM — Financial Management Practice Exam 5
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