CIMA Exam CIMAPRA19-F03-1 Topic 5 Question 93 Discussion

Actual exam question for CIMA's CIMAPRA19-F03-1 exam

Question #: 93
Topic #: 5

A company with 4 million shares in issue wishes to raise $4 million by means of a rights issue

The share price prior to the rights issue is $5.00.

Under the rights issue, 1 million new shares will be issued at $4.00.

When the rights issue is announced it is expected that the Theoretical Ex-rights Price (TERP) will be $4.80

The directors of the company are considering offering any shareholder who does not wish to take up the rights the opportunity to sell the rights back to the company for $1.00.

Which of the following is the most likely consequence of the directors offer?

AIt will have no effect on the take up of the rights because shareholder wealth will be the same whether the rights are taken up or sold back to the company

BThe directors offer will increase demand for the shares and as a consequence the share price will rise above the theoretical ex-rights price.

CIt will encourage more shareholders to sell their lights on the open market.

DIt will result in fewer shareholders taking up the rights and as a consequence less cash will be raised from the rights issue

Show Suggested Answer

Suggested Answer: A

by Alishia at Aug 05, 2024, 06:00 PM

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Clarence

1 months ago

The directors are really throwing shareholders a bone here, but it's probably going to backfire on them. Less cash raised means they'll have to find another way to fund their plans.

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Alesia

1 months ago

Haha, I'd totally sell my rights back for a quick buck. Who needs to invest when you can just cash in and go buy a pizza?

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Cherry

1 months ago

I agree with Alida. The director's offer gives shareholders an easy way out, so they're less likely to take up the rights and contribute to the cash raising.

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Lili

4 days ago

So, less cash will be raised from the rights issue overall.

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Theola

7 days ago

That's true, it gives them an easy way to sell back the rights instead.

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Haley

13 days ago

I think the director's offer will result in fewer shareholders taking up the rights.

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3 months ago

I think the directors offer will increase demand for the shares.

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