Eq3_Lecture - Week 4: Equities 3 / Financial Institutions 1...

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Unformatted text preview: Week 4: Equities 3 / Financial Institutions 1 Secondary markets: Rights issue Financial institutions: Mutual Funds and ETFs 2/21 Roger Loh Rights Offering ¡ Raising funds by issuing new shares to existing shareholders ¡ Will not dilute existing shareholders’ stakes if existing shareholders subscribe to new shares ¡ Illustration using National Power { Existing stock price $20 { No of shares = 1m, Mktcap = $20m { Needs to raise $5m in a rights offering Performance ETFs Mutual Funds Rights Issue Hedge Funds 3/21 Roger Loh National Power Rights Issue ¡ Company decides price of new shares = $10 ¡ No. of new shares needed = 0.5m ¡ Assume each existing share is entitled 1 right { Hence, no of rights needed to buy 1 new share = (1m/0.5m) = 2 rights. { This is known as a 1 for 2 rights offering (2 existing shares allows purchase of 1 new share) ¡ The rights have value since it allows purchase of National Power shares at a discount from the current market value of $20 Performance ETFs Mutual Funds Rights Issue Hedge Funds 4/21 Roger Loh Valuing Rights (eg continued) ¡ Value of share on the ex-rights date ¡ Value of 1 right = $20 – $16.67 = $3.33 ¡ Check if valuation is correct { An investor (not existing shareholder) needs to buy 2 rights in order to buy 1 new share. The total he needs to spend is: $10 + 2 ($3.33) = $16.67 ( ) ( ) 67 . 16 $ 3 1 10 $ 2 $20 = × + × Performance ETFs Mutual Funds Rights Issue Hedge Funds 5/21 Roger Loh Rights Value Linked to Mother Share ¡ If the price of the mother share drops to $15 during the trading of the rights, the rights value must adjust downwards so that the total paid to get a new share is at least = $15...
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Eq3_Lecture - Week 4: Equities 3 / Financial Institutions 1...

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