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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
experts, they have produced cost and revenue forecasts for the five years of operation of the
proposed investment. The company aims to complete the production of three films per year.
The after tax cost of capital for the company is estimated to be 14%.
Year 1 sales for the new business are uncertain, but expected to be in the range of Sh.4-10
million. Probability estimates for different forecast values are as follows:
Sales are expected to grow at an annual rate of 5%.
Anticipated costs related to the new business are as follows:
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
expected to rise by 10% per annum.
(iv) Studio hire costs will be subject to an increase of 30% in Year 3.
(v) Screenplay costs per film are expected to rise by 15% per annum due to a shortage of
skilled writers.
(vi) The new business will occupy office accommodation which has to date been let out for
an annual rent of Sh.20,000. Demand for such accommodation is buoyant and the
company anticipates in finding future tenants at the same annual rent.
(vii) A market research survey into the potential for the film production business cost Sh.25,000.
Required:
Using DCF analysis, calculate the expected Net Present Value of the proposed investment.
(Workings should be rounded to the nearest Sh.‟000‟)
Date posted: December 15, 2021. Answers (1)
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Sales have been protected at Sh.240 million next year. Three alternative policies are under
consideration as follows:
1. Maintain current asset level at 40 per cent of projected sales.
2. Maintain current asset level at 50 per cent of projected sales.
3. Maintain current asset level at 60 percent of projected sales.
Required:
(a) Discuss the expected impact of policies (1) and (3).
(b) The fixed assets of Watu Limited are Sh.100 million and the company wishes to
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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:
As an alternative way of reducing the debtors figure, Nyumbani Security Ltd. would use a debt collection service which has quoted a price of 1% of sales receipts. It is estimated that using the service will have the effect of reducing debtor days by 20 and eliminating 50% of bad debts.
Required:
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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Required:
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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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