What is the yield-adjusted theoretical ex-rights price (TERP)?


CORRECT TEXT

A company wishes to raise new finance using 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.

• The company’s WACC is currently 8%.

What is the yield-adjusted theoretical ex-rights price (TERP)?

Give your answer to 2 decimal places.

$ ?

Answer: 4.06, 4.060

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