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ACCA Applied Skills · Financial Management · Sources of, and raising, business finance

Zentra Co has 8 million shares in issue, quoted at $3.60 each. It announces a 1 for 4 rights issue at $3.00 per share. Using the theoretical ex-rights price (TERP) method, what is the value of one right per existing share held (to the nearest cent)?

The value of a right per existing share is $0.12. TERP is (4 x $3.60 + $3.00) / 5 = $3.48, so each new share's right is worth $0.48, and with one new share for every four held, that is $0.12 per existing share.

  1. A$0.12Correct
  2. B$0.15
  3. C$0.48
  4. D$0.60

Explanation

Four shares at $3.60 = $14.40, plus one new share at $3.00 = $17.40 for five shares, so TERP = $3.48. The discount of a right per new share is $3.48 - $3.00 = $0.48, but per existing share held it is $0.48 x 1/4 = $0.12. The $0.48 option is wrong because it gives the value per new share, not per existing share. $0.60 is the discount to the cum-rights price per new share.

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