Question

Klevin Co is considering an extensive rights issue to raise new finance. It currently has 4 million shares and has been very successful over a prolonged period.

The term of the deal are as follows:

-          One new share for every 4 held at a price of 90% of the existing market value per share.

-          The existing market value is 20 € per share (with rights price).

One of the directors is unhappy with offering any discounts to existing shareholders. He claims that the companies past success should be enough to encourage shareholders to increase their investments.

b) What would be the effect on the TERP value if the new shares were offered at a 20% discount level whilst raising the same total amount of finance?

Select one:

a. The TERP value not change since the total amount raised would be the same

b. The TERP would increase

c. The TERP would fall

d. The TERP would fall to a level unacceptable to existing shareholders

Answer 1

Calculation of the new shares issued:

Calculation of TERP (when the price is 90% of existing market value):

Calculation of TERP (when the price is issued at 20% discounted):

The TERP is fallen to $19.20 from $19.60.

Hence, option C is correct.