A rights issue is a method of raising new share capital by means of an offer to existing
shareholders, inviting them to subscribe cash for new shares in proportion to their
existing holding. It is by far the most important way in which new share capital is raised.
A rights issue may be made by any type of company, private or public, listed or unlisted.
The analysis below, however, applies primarily to listed companies.
The major advantages of a rights issue are:
(i) Under the Stock exchange regulations all issues of shares for cash other than
rights issues must be approved by the company in general meeting. In contrast,
subject to the Memorandum and Articles of Association, a rights issue may be
made at the discretion of the directors. The Stock Exchange is therefore
unlikely to accept any new issue of shares by a quoted company unless it is a
rights issue, unless the purpose of the new issue is to allow a partial takeover by
a large company or financial institution, which would be in the best interests of
existing shareholders.
(ii) Rights issues are cheaper than issues to the general public. This is partly
because no prospectus is required, partly because the administration is simpler
and partly because the cost of underwriting will be less;
(iii) It is more beneficial to existing shareholders than an issue to the general public
as it avoids expense represented by the discount on market value required on all
issues. In effect, a rights issue secures the market discount for existing
shareholders by ensuring that new shareholders cannot buy into the company
at a price which is beneficial to them and, therefore, detrimental to the existing
shareholders;
(iv) Relative voting rights are unaffected;
(v) As a method of issuing new equity, it provides a broader base for the company,
which will make future borrowing by the company relatively easier.
Kavungya answered the question on December 15, 2021 at 07:11
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The Independent Film Company plc is a film company which purchases distribution rights on films from small independent producers, and sells the films on to cinema chains for national and international screening. In recent years the company has found it difficult to source sufficient films to maintain profitability. In response to the problem, the Independent Film Company has decided to invest in commissioning and producing films in its own right. In order to gain the expertise for this venture, the Independent Film Company is considering purchasing an existing
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Using data collection from the existing distribution business and discussions with industry
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The after tax cost of capital for the company is estimated to be 14%.
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Additional Information
(i) No capital allowances are available.
(ii) Tax is payable one year in arrears, at a rate of 33% and full use can be made of tax
refunds as they fall due.
(iii) Staff wages (technical and non-production staff) and actors‟ salaries, are
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Date posted: December 15, 2021. Answers (1)
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(a) Discuss the expected impact of policies (1) and (3).
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The company wishes to reduce its working capital requirements by reducing the debtor collection period.
Nyumbani Security Ltd.'s accountant has extracted average debtors profile which is shown below:
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Calculate the change in working capital requirements and bad debts which would result from:
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Date posted: December 15, 2021. Answers (1)
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Date posted: December 15, 2021. Answers (1)
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Date posted: December 15, 2021. Answers (1)
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Date posted: December 15, 2021. Answers (1)
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