3.

Formula
Theoretical Ex-Rights
Price

Market Value of shares prior to rights issue + Cash raised from

rights issue
Number of shares after rights issue

4. Example
ABC PLC issued 1 for 4 rights shares on 31st March 2013 at an exercise price of $1. Market
value of its shares immediately prior to the rights issue was $1.5 per share. ABC PLC had 1
million shares before the issuance of rights shares. All rights were exercised by shareholders
on 31st March 2012.
Theoretical Ex-Rights Price may be calculated as follows:
Step 1: Calculate market value of ABC PLC prior to the rights issue
Market Value before rights issue
($1.5 x 1 million shares)
$1,500,000
Step 2: Calculate cash proceeds raised from the rights issue
Cash raised from rights issue
($1 x 250,000*)
*(1 million / 4 = 250,000 rights shares)

$250,000

Step 3: Calculate number of shares after the rights issue

Number of Shares
(1 million + 250,000 [step 2]) 1,250,000
Step 4: Calculate Theoretical Ex-Rights Price
$1,500,000 (Step 1) + $250,000 (Step
=
2)
Theoretical Ex-Rights Price =
$1.4 per share
1,250,000 (Step 3)

5. Rationale
Value of a company's shares represents the present value of future cash flows expected to be
earned from the share in the form of dividends and capital gains from future share price
appreciation. 'Theoretically' therefore, the value of a company's shares after a rights issue
must equal its fraction of the sum of market capitalization immediate prior to rights issue and
the cash inflows generated from the rights issue.

5. Importance
Theoretical Ex-Rights Price is an objective measure of the value of company's share after a
rights issue and is used as a basis for the calculation of bonus element in Earnings Per Share
involving rights issue. TERP simplifies the process of determining the bonus element in EPS
calculation since all rights under a rights issue are assumed to be exercised on a single date.
- See more at: http://accounting-simplified.com/ifrs/ias-33-eps/basic/theoretical-ex-rightsprice.html#sthash.FyoOPJHe.dpuf

Current Market Price: $0.15

After 5:1 share consolidation,
Theoretical Market Price after share consolidation:
= $0.15*5
= $0.750
After 1 rights share @$0.33 for every 2 shares based on New Market Price of $0.750
Theoretical Market Price after rights should be
= {[200 shares * $0.750 (Current Market Price)] + [100 rights shares * $0.33 (rights exercise
price)]} / [200 + 100] (Total no. of shares after exercise rights)
= ($150 + $33) / 300
= $0.610
1. Rights Issue - Definition
Rights issue involves the issue of shares to existing members in proportion to their respective
shareholding in the company. For example, a 'one for three rights issue' would entitle
shareholders with one new share for every three shares that are already held in the company.
Shares issued in a rights issue normally have an exercise price below the prevailing market
price of similar shares.
2. Rights Issue Adjustment - Rationale
Rights issue necessitates adjustment in Earnings Per Share calculation. This is because rights
issues involve an element of bonus shares where the exercise price is set below the market
price. As with the EPS calculation involving bonus shares, the effect of bonus shares in the EPS
calculation must be cancelled by inflating the number of weighted average shares by the
number of bonus shares in the period in which rights issue takes place and as well as for any
prior period comparatives presented without any time apportionment.
If no such adjustment is made in the EPS calculation in respect of the bonus element in a
rights issue, the performance of an entity may be unnecessarily penalized in the year in which
rights issue takes place.
Shares deemed to be issued at the fair market value in a rights issue are accounted for in the
EPS calculation in a similar manner to the EPS involving shares issued for full consideration
(i.e. included in the weighted average shares from the date of the issue).

3. Formulae
Following formulae illustrate how rights issue adjustment is incorporated in the Basic EPS
calculation:
EPS for the year (X)
=
Earnings attributable to ordinary share holders for the year
[Weighted Average Shares + Bonus Element + Fair Value Element x (time
apportionment)]
2

EPS for the year (X-1) = Earnings attributable to ordinary share holders for the year
[Weighted Average Shares + Bonus Element]
EPS for the year (X+1) = Earnings attributable to ordinary share holders for the year
[Weighted Average Shares + Bonus Element + Fair Value Element]
Where:
Year (X)
= Year in which rights issue is made (current period)
Year preceding the period in which rights issue takes place (prior period
comparative)

Year (X-1)

Year (X+1)

= Year subsequent to the period in which rights issue is made (subsequent period)

Weighted
Average
Shares

Number of shares at the start of the year

= PLUS Shares issued for consideration x (time apportionment)
Less Shares redeemed during the year x (time apportionment)

Bonus
Element

Fair Value
Element

Number of shares in the rights issue deemed to be issued without consideration.

Bonus shares are added in the calculation of the denominator in full without
any adjustment for time apportionment. The number of deemed bonus shares
=
included in the rights issue are added in current period, comparative prior
periods and all subsequent periods in the EPS calculation as though the bonus
shares had been issued before the earliest period presented.
Number of shares in the rights issue deemed to be issued at the fair value with
= reference to the theoretical ex-rights price. These shares are included in the
EPS calculation from the date of rights issue.

4. Example
ABC PLC, which has a year end of 31st December 2012, issued 1 for 3 rights shares on 30th
June 2012. The exercise price for shares was $1.5 whereas the market price of ABC PLC shares
just prior to the issue of rights shares was $2. All rights were exercised on 30th June 2012.
Following information relates to ABC PLC:
Ordinary Shares as on 1st January 20113,000,000
Earnings attributable to ordinary shareholders:
2011$6,400,000
2012$7,200,000
Calculation of Earning Per Share for 2011 and 2012 for presentation in financial statements for
the year ended 31st December 2012 would be as follows:
Step 1: Calculate the Theoretical Ex-Rights Price
Value of ABC PLC prior to rights issue
(3,000,000 x $2)
Cash raised from rights issue
(1,000,000 x $1.5)
Value of ABC PLC after rights issue
(Sum)
Theoretical Ex-Rights Price per share
($7,500,000 / (3,000,000 + 1,000,000))

$6,000,000
$1,500,000
$7,500,000
$1.875
3

Step 2: Calculate the Fair Value Element

Cash raised from rights issue
$1,500,000
Theoretical Ex-Rights Price per share
$1.875
Number of shares deemed to be issued at fair value
800,000
(1,500,000 / 1.875)
Step 3: Calculate the Bonus Element
Number of shares deemed to be issued at fair value
Total number of shares issued (3,000,000 / 3)
Number of deemed bonus shares (Difference)

800,000
1,000,000
800,000

Step 4: Calculate Weighted Average Shares

2011 Shares at the start of the year
Add: Bonus Share (Step 3)
Weighted Average Shares

3,000,000
200,000
3,200,000

2012 Shares at the start of the year

Add: Bonus Share (Step 3)
Add: Share issued at fair value
(800,000 (Step 2) x 6 / 12)
Weighted Average Shares

3,000,000
200,000
400,000
3,600,000

As with the EPS calculation involving bonus issue, the number of deemed bonus shares are
added in the weighted average shares calculation without time apportionment to facilitate
comparison.
Step 3:

Calculate Earnings Per Share

2011 Earnings attributable to ordinary share holders $6,400,000
Weighted Average Shares (Step 4)
3,200,000
Earnings Per Share ($ 6,400,000 / 3,200,000)
$2
2012 Earnings attributable to ordinary share holders $7,200,000
Weighted Average Shares (Step 2)
3,600,000
Earnings Per Share ($ 7,200,000 / 3,600,000)
$2

ABC PLC's EPS for the two years show that its profitability has remained constant over the
period and the level of earnings have increased in line with the increase in company's
resources from the rights issue.
If the EPS calculation ignored the bonus element, EPS for the two years would be as follows:
2011 EPS ($6,400,000 / 3,000,000) $2.13
2012 EPS ($7,200,000 / 3,500,000) $2.06
4

Clearly the decline in the EPS as presented above does not reflect the trend in the
profitability of ABC PLC as the calculation ignores the fact that 20% of the shares issued in
the rights issue were effectively free of cost to the owners (i.e. bonus share). It is for this
reason that it is necessary to incorporate the effect of the bonus element involved in rights
issue in the EPS calculation.
- See more at: http://accounting-simplified.com/ifrs/ias-33-eps/basic/rightsissue.html#sthash.bQdTTHRp.dpuf

How to compute theoretical Ex Price

How to compute theoretical ex price.
Many of my friends ask me how to calculate theoretical ex price. I thought it will be useful to
post in my blog so that others can also benefit.
To compute ex price, there are two major factors:
A) No gain No loss
B) Theory only
Example: Dividend
HWGB to pay RM0.20 dividend
Ex Date: 28/01/2011.
Therefore, the dividend cum date is 27/01/2011.
27/01/2011 HWGB closing price is RM10.00
The theoretical ex price will be RM9.80
If you hold 1 share of HWGB, on 27/01/2011 your TOTAL value is RM10.00.
On ex date 28/01/2011, your TOTAL value is RM9.80 + RM0.20 (dividend) = RM10.00. Therefore
no loss no gain.
This is just theory, in reality some dividend got tax, some no tax and different people got
different tax rate and may get rebate. The price is also subject to demand and supply.
By using the two factors of A) No gain no loss and B) Theory only, HWGB theoretical ex price
will be RM9.80.
If HWGB share price close at RM9.85 on 28/01/2011, then on 28/01/2011 HWGB share price is
UP RM0.05 and NOT down RM0.15.
Example: Bonus Issue.
Every 5 shares get 1 bonus.
Ex Date: 28/01/2011.
Cum date is 27/01/2011.
27/01/2011 SAAG closing price is RM9.00
Every 5 will get extra 1, so will end up having 6.
Then use RM7.00 X 5 and divided by 6 = RM7.50.
Another method to compute is..
Assuming you hold 1000 SAAG shares. Your TOTAL value is RM9000 (1000 X RM9).
5

After bonus you will have 1200 SAAG shares, ex price will be RM9000 divided by 1200 =
RM7.50
No gain no loss.
More complicated: Rights Issue
Every 5 will entitle to subscribe 1 rights issue at RM3.00
Ex Date: 28/01/2011.
Cum date is 27/01/2011.
HWATAI closing price is RM9.00
Assuming you hold 1000 HWATAI shares. Your TOTAL value is RM9000 (1000 X RM9).
You are entitled 200 rights issue (1000 divided by 5), and you need to pay RM600 (200 X
RM3.00).
Now your TOTAL VALUE/ COST is RM9000 + RM600 = RM9600
You will end up having 1200 HWATAI shares.
Theoretical ex price = RM9600 divided by 1200 = RM8.00
No gain no loss.
Let me rephrase. You paid RM9000 to get your 1000 HWATAI shares, and paid further RM600 to
get 200 shares. Your total cost/value is RM9600.
Now that in theory, the price is RM8.00. You sold ALL your 1200 shares at RM8.00 you will get
RM9600. No gain no loss for you.
I think thats all for the day.
Next time I will post on Free warrants, Rights with Warrant, etc.