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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Alida

16 days 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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