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Tut 05: Rights Issue

1. Generally the cost of equity is higher to the Tut 05: Rights Issue
company as compared to loan i.e. if the same 1. Generally the cost of equity is higher to the
amount is raised through equity rather than company as compared to loan i.e. if the same
loan it cost more to the company. Reasons amount is raised through equity rather than
attributed to it are loan it cost more to the company. Reasons
a. Shareholders expectations
b. Underwriting commission attributed to it are
c. Flotation cost a. Expectations of shareholders v/s
d. Tax deductibility of interest and divided Bondholders
b. Underwriting commission
Discuss these 4 issues in the above specified c. Flotation cost
context. d. Tax deductibility of interest and divided
2. A firm is thinking of a rights issue to raise Rs Discuss these 4 issues in the above specified
5 crore. It has a 5 lakh share outstanding and context.
the current market price of the share is Rs 170. 2. A firm is thinking of a rights issue to raise Rs
The subscription price on the new share will 5 crore. It has a 5 lakh share outstanding and
be Rs 125 per share. the current market price of the share is Rs 170.
(i) How many shares should be sold to
The subscription price on the new share will
raise the required funds?
(ii) How many rights are needed to be Rs 125 per share.
(i) How many shares should be sold to
purchase one new share?
(iii) What is the value of one right? raise the required funds?
(ii) How many rights are needed to
3. A company is considering rights offering to purchase one new share?
raise funds to finance new projects, which (iii) What is the value of one right?
require Rs 4.5 crore. The flotation cost will be 3. A company is considering rights offering to
10% to funds raised. The company currently raise funds to finance new projects, which
has 20 lakh shares outstanding and the current require Rs 4.5 crore. The flotation cost will be
market price of its share is Rs 100. The 10% to funds raised. The company currently
subscription price has been fixed at Rs 50 per has 20 lakh shares outstanding and the current
share. market price of its share is Rs 100. The
I. How many shares should be sold to raise
subscription price has been fixed at Rs 50 per
the funds required for financing the new
share.
projects? I. How many shares should be sold to raise
II. How many rights required to buy one new
the funds required for financing the new
share?
III. What is the value of one right? projects?
IV. Show the impact on a shareholders wealth II. How many rights required to buy one new
who holds required rights to buy one new share?
III. What is the value of one right?
share if IV. Show the impact on a shareholders wealth
(a) Individual exercised his rights, or
(b) Sells his rights, or who holds required rights to buy one new
(c) Does not exercise rights. share if
(a) Individual exercised his rights, or
(b) Sells his rights, or
(c) Does not exercise rights.