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CIMA Exam CIMAPRA19-F03-1 Topic 3 Question 68 Discussion

Actual exam question for CIMA's CIMAPRA19-F03-1 exam
Question #: 68
Topic #: 3
[All CIMAPRA19-F03-1 Questions]

A company wishes to raise new financeusing a rights issue to invest in a new project offering an IRR of 10%

The following data applies:

* There are currently 1 million shares in issue at a current market value of $4 each.

* The terms of the rights issue will be $3.50 for 1 new share for 5 existing shares.

* Thecompany's WACC is currently 8%.

Whatistheyield-adjustedtheoreticalex-rightsprice (TERP)?

Give your answer to 2 decimal places.

$ ?

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Suggested Answer: C

by Regenia at Apr 24, 2023, 03:53 PM

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Ailene
1 months ago
Wait, is the answer supposed to be $4.20? I'm pretty sure that's the correct answer. What do you mean, 'not a valid option'? Clearly, the exam writers need to brush up on their financial calculations.
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Britt
1 months ago
I'm just glad they're not asking me to calculate the intrinsic value of the company. That would be a real brain-teaser. This TERP thing seems like a piece of cake in comparison.
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Shenika
1 months ago
Hmm, I wonder if the IRR of 10% on the new project has any bearing on the TERP calculation. Maybe I should factor that in somehow. Time to break out the financial calculator!
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Bethanie
6 days ago
User 2: I agree, we should consider that when calculating the yield-adjusted theoretical ex-rights price.
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Erinn
15 days ago
User 1: I think the IRR of 10% on the new project does impact the TERP calculation.
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Jenelle
1 months ago
Hold on, I need to double-check the formula for TERP. Isn't it something like (Current Shares * Current Price + New Shares * Rights Issue Price) / (Current Shares + New Shares)? This seems straightforward enough.
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Hassie
7 days ago
Great, thanks for confirming. I'll go ahead and calculate the yield-adjusted theoretical ex-rights price using that formula.
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Elliot
12 days ago
So, for this scenario, the TERP would be $4.06.
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Jolanda
17 days ago
Yes, that's correct. The formula for TERP is (Current Shares * Current Price + New Shares * Rights Issue Price) / (Current Shares + New Shares).
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Christoper
2 months ago
Okay, let's see if I can figure this out. The current market value is $4 per share, and the rights issue price is $3.50 for 1 new share for 5 existing shares. With a WACC of 8%, the TERP should be somewhere between the two, right? I'll give it a shot.
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Angelica
25 days ago
B) 4.06, 4.050
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Lilli
1 months ago
A) 4.06, 4.060
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Kimbery
2 months ago
Do you think the answer is A) 4.06, 4.060 or B) 4.06, 4.050?
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Melodie
3 months ago
I agree, it helps determine the fair value of the company's shares after the rights issue.
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Kimbery
3 months ago
I think the yield-adjusted theoretical ex-rights price is important for investors.
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