ExpertEasy2 marksMultiple Choice
ACCA · Question 12 · Business Finance
Section A
AstroTour PLC, a space tourism company, currently has 10 million shares in issue trading at $8.00 each. To fund a new launchpad, the company announces a 1-for-4 rights issue at a discount price of $6.00 per share.
What is the Theoretical Ex-Rights Price (TERP) per share?
Section A
AstroTour PLC, a space tourism company, currently has 10 million shares in issue trading at $8.00 each. To fund a new launchpad, the company announces a 1-for-4 rights issue at a discount price of $6.00 per share.
What is the Theoretical Ex-Rights Price (TERP) per share?
Answer options:
A.
$7.00
B.
$7.50
C.
$7.60
D.
$8.00
How to approach this question
Calculate the total value of the shares before the issue, add the cash raised from the new share, and divide by the new total number of shares. (4 shares @ $8) + (1 share @ $6) = Total Value / 5 shares.
Full Answer
C.$7.60✓ Correct
The Theoretical Ex-Rights Price (TERP) is the weighted average price of the shares after the rights issue.
Existing shares: 4 shares x $8.00 = $32.00
New shares: 1 share x $6.00 = $6.00
Total value of 5 shares = $38.00
TERP = $38.00 / 5 = $7.60 per share.
Common mistakes
Taking a simple average of the cum-rights price and the issue price (($8+$6)/2 = $7).
Practice the full ACCA FM — Financial Management Practice Exam 6
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