ACCA Financial Management (F9) Certification Practice Exam

In the calculation of the Theoretical Ex-Rights Price (TERP), what does N represent?

1. The number of shares outstanding

2. The number of shares required to buy a new share

3. The number of new shares issued

4. The number of shareholders

The correct answer is: The number of shares required to buy a new share

In the calculation of the Theoretical Ex-Rights Price (TERP), the letter N specifically represents the number of shares required to buy a new share. This is a crucial aspect of determining the TERP, as it reflects the rights issue arrangement where existing shareholders can purchase additional shares at a specified ratio. Understanding this ratio is essential because it impacts the dilution effect on existing shares and the resulting price per share after the rights issue is executed. The TERP provides a way to gauge the adjusted price of the shares post-rights issue, integrating the value of the newly issued shares with the existing shares. When calculating the TERP, the inputs involve the existing market price of the shares, the number of existing shares, the number of new shares issued, and the ratio of existing shares to new shares (represented by N). Thus, the role of N as the number of existing shares needed to acquire one new share is integral to computing the adjusted price accurately, reflecting both the pre and post-issue scenario in share valuation.