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

A company with 4 million shares in issue wishes to raise $4 million by means of a rights issueThe 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 $4.80The 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?
A) It 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
B) The directors offer will increase demand for the shares and as a consequence the share price will rise above the theoretical ex-rights price.
C) It will encourage more shareholders to sell their lights on the open market.
D) It will result in fewer shareholders taking up the rights and as a consequence less cash will be raised from the rights issue

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

Actual exam question for CIMA's CIMAPRA19-F03-1 exam
Question #: 93
Topic #: 5
[All CIMAPRA19-F03-1 Questions]

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?

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Suggested Answer: A

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

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Lorean
8 months ago
TERP is $4.80 after the rights issue, just FYI.
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Valene
8 months ago
Totally agree with D. People might just cash out instead of buying more.
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Onita
8 months ago
Wait, why would anyone sell their rights back for $1? Seems low.
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Bobbye
8 months ago
I think option D makes sense. Less cash raised if people sell back.
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Stanton
9 months ago
The rights issue is at $4.00, so it's cheaper than the current price.
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Refugia
9 months ago
I recall that offering to sell rights back could actually discourage shareholders from taking up their rights, which might align with option D. But I’m not sure if that’s the most likely outcome.
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Rosita
9 months ago
I’m leaning towards option A because it seems like the wealth effect would be neutral, but I’m not completely confident about how selling rights back might influence overall demand.
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Carissa
9 months ago
This question feels familiar! I think I practiced a similar one where the directors' decisions impacted shareholder decisions. I wonder if the offer will really lead to fewer rights being taken up.
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Mitzie
9 months ago
I remember studying how rights issues can affect shareholder behavior, but I'm not entirely sure how the offer to sell rights back would change things.
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Sophia
9 months ago
This is a tricky one, but I feel pretty confident I can work it out. The key is to really understand how the rights issue and the directors' offer will affect the value of the shares. If I can nail that, I should be able to select the most likely consequence.
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Ty
9 months ago
Okay, I think I've got a good strategy for this. I'll start by calculating the TERP to see how that compares to the share price before the rights issue. Then I'll analyze how the directors' offer might impact shareholder behavior and the overall outcome of the rights issue. Gotta be careful with the details on this one.
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Annice
9 months ago
Hmm, I'm a bit confused by all the numbers and calculations here. I'll need to really focus and work through this step-by-step to make sure I get the right answer. Hopefully I can figure out the implications of the directors' offer.
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Glory
10 months ago
This looks like a pretty straightforward rights issue question. I think I can handle this one - the key is to understand how the theoretical ex-rights price (TERP) is calculated and how that affects shareholder wealth.
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Darrin
10 months ago
Hmm, this question seems straightforward, but I want to make sure I understand the concepts correctly. I'll carefully read through the options and think about the key differences between them.
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Haydee
10 months ago
I'm a bit confused by the wording of the question. What exactly is an "open log file standard"? Is that just referring to a standard format that can be read by multiple systems? I'll need to think this through carefully.
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Clarence
1 year 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 year 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 year 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
1 year ago
So, less cash will be raised from the rights issue overall.
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Theola
1 year ago
That's true, it gives them an easy way to sell back the rights instead.
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Haley
1 year ago
I think the director's offer will result in fewer shareholders taking up the rights.
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Alida
1 year ago
Option D seems the most logical. If shareholders can sell their rights back for $1, fewer will exercise them, resulting in less cash raised from the rights issue.
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Lajuana
1 year ago
So, fewer shareholders taking up the rights could result in less cash being raised overall.
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Vincenza
1 year ago
That would mean less cash raised from the rights issue.
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Lindsey
1 year ago
If shareholders can sell their rights back for $1, they might choose to do that instead of exercising them.
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Taryn
1 year ago
I think option D is the most likely consequence.
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Stevie
1 year ago
But wouldn't that result in less cash being raised from the rights issue?
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Ashley
1 year ago
I agree with Herman, if shareholders can sell back the rights for $1.00, more people might be interested in buying the shares.
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Herman
1 year ago
I think the directors offer will increase demand for the shares.
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