Long-term Finance

Question 1

Explain and calculate the Theoretical Ex-Rights Price.

Answer 1

The theoretical market price of a stock after a rights issue.

((N*CRP)+IP)/(N+1)

N = Number of shares required for 1 new share.
CRP - Cum Rights Price
IP - Issue Price

Question 2

Explain Equity Finance vs Debt Finance w/ examples.

Answer 2

Equity finance is when funding is sought after existing shareholders or by new investors, through:

• Rights Issues
• New Shares Issues - Stock Market.
• Retained Earnings??

Debt finance is when funding is obtained from financial institutions such as:
- Banks
- Other Companies (Debentures)
-

Question 3

Explain the TERP and the calculation

Theoretical Ex-Rights Price

Answer 3

The theoretical market price of a share after a rights issue.

[(NxCRP)+IP] / (N+1)

N = Number of shared required for 1 new share.
CRP = Cum Rights Prices
IP = Issue Price