1. Chapter 6: Issue of shares Lecture 2

2. 1. Right issue  Issue to existing shareholders (want to raise new ordinary share capital) 2. Scrip issue  Issue shares without receiving money (dividends) 3. New loan/reference shares issued 4. Existing shareholders sells a large block of shares – offer for sale

3.  UK – company want to issue new shares: offer to existing shareholders first: Rights issue  SA – per the JSE’s listing requirements ‘pre- emptive’ right of shareholders Rights issue is an offer of shares to existing shareholders at a given price, in proportion to their existing holding  Price @ a discount  Effects of a rights issue:  New shares issued, and share capital increase  New cash/ funding available  Total value of the company increase  Price per share decrease (due to discount)

4.  Purpose of rights issue:  Company has fundamental problem – will only survive if capital injection is made  To reduce debt/equity capital ratio  Company grew to quickly  Finance new project / investment  To pay purchase of another company (acquisition) Company will have rights issue when stock market is high Study the timetable for rights issue

5.  Market capitalisation = P x number of shares (where P is the share price)  Before rights issue: P = Market cap/number of shares  After rights issue: P = (Original market cap + extra value) total number of new shares Extra value = new money raised – issue expenses +/- change in value due to perception of market

6.  Theoretical ex-right share price is when only the amount of new money raised by the rights issues is considered. Therefore suppose the extra value to the company is = to the gross amount raised mP + nQ P’ = m + n  Theoretical price is the WA of P and Q  P = share price before the issue  Q = price at which new shares are offered

7. Estimate the theoretical ex-rights share price in the following case: 2.Current price:250c Offer price:150c Basis: 1 for 3 P = (mP + nQ)/(m+n) = (3*250c + 1*150c)/(3+1) = 225c

8.  Possible courses of action for the shareholder:  Take up the right  Sell the right (nil-paid right)  What is the value of the right? = ex-right share price – rights issue price = 225c – 150c = 75c

9. Effect on shareholder:  If take up 100% of the rights: increase in value of investment = amount spend  If sell sufficient rights to take up a percentage of the rights to eliminate a decrease in the value: no net expenditure and no increase in value of investment  If sell rights: money earned = reduction in decrease of value of investment Example p22

10.  Rights issues always @ discount  Are right issues underwritten?  Usually  Not needed when “deeply discounted” rights issue is used  Problems with deep discounted issues:  Possible capital gains tax implications  Companies are not allowed to issue shares below par value  Could be interpreted as sign of weakness

11.  Question 6.5 – Calculating the ex-right share price  Example p22 Rights issue – effect on shareholder

12.  Please note there will be no class Thursday 22 May 2014  Supplementary test Monday 26 May 2014 (during lecture time)  There will be class Thursday 29 May 2014 - Finalise chapter 6 - Script issues - Discuss the exam paper - Receive back semester test 2