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.

$ ?

A4.06, 4.060

B4.06, 4.050

Show Suggested Answer

Suggested Answer: C

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

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Ailene

2 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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Lore

1 days ago

I think the answer is A) 4.06, 4.060

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Britt

2 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

2 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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Gregoria

8 days ago

User 3: Let's use the financial calculator to factor in the IRR and get the accurate TERP.

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Bethanie

16 days ago

User 2: I agree, we should consider that when calculating the yield-adjusted theoretical ex-rights price.

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Erinn

25 days ago

User 1: I think the IRR of 10% on the new project does impact the TERP calculation.

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Jenelle

2 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

17 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

22 days ago

So, for this scenario, the TERP would be $4.06.

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Jolanda

27 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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