1. Rights Issues And the effect on share prices

4. If, after a company has been floated on the stock exchange, they wish to raise more capital, the only way they can do this is by selling more shares. They can’t just make more up and sell them – they need to offer a Rights Issue. A rights issue is a release of shares at a discounted price. Rights Issue This is where shares are offered to existing share holders on a pro-rata basis. There are 2 types of Rights Issues – renouncable and non-renouncable. Renoucable Rights This is where you can sell the rights to other investors, or not purchase them and let the company take them back or you can take up the rights (which means to buy shares at a discounted price) Non -Renoucable Rights The only options you have for these rights is to take up the offer or to let the offer lapse. Rights issues are expressed as a ratio – so a 1:4 rights issue means that for every 4 shares you own – you will receive 1 at a discounted price. The effect of the release of a rights issue is to theoretically water down the market price. So from the example above there are now 5 shares on the market with an overall value of 4 – so the price may drop.

5. BFB announces a renounceable 1:5 rights issue at $2.50. The shares are currently trading on the market at $3.35. Bronte owns 4000 shares in the company. a)How many BFB shares will Bronte be entitled to? b)How much will Bronte have to pay if he took up all the shares he was entitled to? c)Calculate the expected price of BFB after the rights issue. d)What is the value of a BFB right on the market? e)How much would Bronte get if he sold all his rights on the market?

6. BFB announces a renounceable 1:5 rights issue at $2.50. The shares are currently trading on the market at $3.35. Bronte owns 4000 shares in the company. a)How many BFB shares will Bronte be entitled to? b)How much will Bronte have to pay if he took up all the shares he was entitled to? c)Calculate the expected price of BFB after the rights issue. d)What is the value of a BFB right on the market? e)How much would Bronte get if he sold all his rights on the market?

7. BFB announces a renounceable 1:5 rights issue at $2.50. The shares are currently trading on the market at $3.35. Bronte owns 4000 shares in the company. a)How many BFB shares will Bronte be entitled to? b)How much will Bronte have to pay if he took up all the shares he was entitled to? c)Calculate the expected price of BFB after the rights issue. d)What is the value of a BFB right on the market? e)How much would Bronte get if he sold all his rights on the market?