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HF Holding Plc. has 40 million ordinary shares of 50p is in issue. These shares are currently valued on the London Stock Exchange at £1.80 per share. The company directors have decided to offer existing shareholders one new share for every four shares held at f1.35 i.e. a one-for-four issue. What is the theoretical ex-rights price? Select the correct answer from the option listed below. £1.82 £1.65 f1.71 £1.53

Question

HF Holding Plc. has 40 million ordinary shares of 50p is in issue.
These shares are currently valued on the London Stock Exchange
at £1.80
per share. The company directors have decided to offer
existing shareholders one new share for every four shares held at
f1.35 i.e. a one-for-four issue.
What is the theoretical ex-rights price?
Select the correct answer from the option listed below.
£1.82
£1.65
f1.71
£1.53

HF Holding Plc. has 40 million ordinary shares of 50p is in issue. These shares are currently valued on the London Stock Exchange at £1.80 per share. The company directors have decided to offer existing shareholders one new share for every four shares held at f1.35 i.e. a one-for-four issue. What is the theoretical ex-rights price? Select the correct answer from the option listed below. £1.82 £1.65 f1.71 £1.53

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ClaraProfessional · Tutor for 6 years

Answer

The theoretical ex-rights price is \(£ 1.71\).

Explain

## Step1:<br />Firstly, we need to understand how the theoretical ex-right price is calculated. The theoretical ex-right price (TERP) is the estimated price of a share after a rights issue. It is calculated by adding the current market capitalization of a company to the risen capital from a rights offering, and then dividing the result by the total number of shares in existence after the rights offering.<br /><br />## Step2:<br />Let's estimate the given problem. The values are:<br />Market price per share = \(£ 1.80\). <br />Allocated new share = \(£ 1.35\). <br />Rights offered for buying new shares = 4. <br /><br />We calculate the TERP by using the following formula <br />### **\(\text{TERP} = \frac{( \text{Market price per share} × \text{Rights offered} + \text{Allocated price per new share})}{\text{The total number of shares after the rights offered}}\)**.<br /><br />## Step3:<br />Now let's perform the substitution and calculation of the obtained values.<br />### **\(\text{TERP} = \frac{(1.80×4 + 1.35)}{(4 + 1)}\)**.<br /><br />Now, performing the calculation \(TERP = £ 1.71\)<br /><br />Multiplying in numerator comes about \(£ 7.2 + £ 1.35 = £ 8.55\)<br />Dividing the numerator value by the numbers of shares \(£ 8.55 / 5 = £ 1.71\).
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