Question 1

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?

Accepted Answer

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.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Taking a simple average of the cum-rights price and the issue price (($8+$6)/2 = $7).

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?

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 6

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