ACCA FM · Chapter 10 · Question 1 of 11
A company's shares are trading at $4.00 cum rights. It announces a 1 for 4 rights issue at $3.20 per share. What is the theoretical ex-rights price (TERP)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) $3.84
Explanation
TERP = (market value of existing shares + cash raised) / total shares after the issue = (4 x $4.00 + 1 x $3.20) / 5 = $19.20 / 5 = $3.84. A simple average of the two prices ($3.60) ignores the ratio of old to new shares.
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