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ACCA Strategic Professional · Advanced Financial Management · Financing acquisitions and mergers

Cobalt plc has 400 million shares at $2.50 cum-rights. It makes a 1 for 4 rights issue at $2.00 to raise funds for a cash acquisition. Ignoring issue costs, what is the theoretical ex-rights price (TERP)?

The theoretical ex-rights price is $2.40. Four existing shares worth $2.50 each total $10.00, adding one new share at $2.00 gives $12.00 for five shares, so each share is worth $2.40 after the rights issue.

  1. A$2.40Correct
  2. B$2.50
  3. C$2.20
  4. D$2.30

Explanation

Four shares at $2.50 = $10.00 plus one new share at $2.00 = $12.00. Divide by 5 shares: TERP = $2.40. Using $2.00 only or averaging $2.50 and $2.00 gives wrong answers such as $2.25; $2.50 ignores dilution.

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