Investor A's ROC will be dilutive relative to Investor B's ROC
No need to manipulate the numbers.
Just try to key in any reasonable number for earning, nil-paid rights, discount rate etc into the worksheet and the result will always be the same. ROC of Investor A will always be lower than the ROC of Investor B. Maths is not biased when the same set of numbers is applied to both investors.
Let continue with the Maths:
Assuming Investor A will always sell his entitled nil-paid rights and Investor B will always fully subcribe for his entitlement of nil-paid rights.
After three rounds of cash calls, relative difference in ROC between Investor A and Investor B is slowly becoming more obvious.
The rights exercise price is $0.90 i.e. 10% discount to the current price at $1 and current dividend yield at $1 is 10%.
$0.04?
$0.05?
Posts
Hi CW,
ReplyDeleteOf course, maths is not bias. However, the assumptions we put in will affect the results. The bias is planted by the person who sets the assumptions.
This exercise you have now proposed (i.e. 3 rounds of cash call) is simply perpetuating and magnifying those initial assumptions.
You did not answer Drizzt's question when he suggested that "the figures don't seem to be correct". Yes, why assume selling the rights at 2c? You might say that TERP is just the theoretical ex-rights price but you are also working on a hypothetical situation. So, Drizzt's question is valid.
Hi CW,
ReplyDeleteI see you have made some additions to the blog post. Haha.. OK, you got my drift at least from the perspective of pricing nil-paid rights. I think readers can expand on our discussion so far and draw better informed conclusions now. Thank you for the effort. :)