Investment Clubs Manual062

Investment Clubs Manual062 - /’ 54 October 2008 The next...

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Unformatted text preview: /’-\ 54 October 2008 The next entry, shown on the second line of Example three. concerns a bonus issue, otherwise known as a scrip or capitalisation Issue. The company has allocated to each shareholder, at a specified date, a number of additional shares, at no cost, calculated by reference to the shares already held. In the example illustrated the issue was a one-for-ten capitalisation issue. The additional 100 shares are noted in column three; in column six the number of shares held is increased to i,100.The average price is recalculated and the new figure entered in column eight. The bonus issue brings down the market price of the share from £1.54 to £1.48, but then the share price continues to rise until, when it reaches £1.88, the club decides to take some profit. As shown in line three of the example. 500 shares were sold, leaving the club holding the balance of 600. The net return from the stockbroker, after expenses, was £905, which has been subtracted from the original cost to show the net cost of the shares retained as £445.40. This reduces the average price paid for the 600 retained shares to 74p. The next event, shown on line four of the example, concerns a rights issue. The company declared a one-for-four rights issue at £1.60 and the club decides to take up its full entitlement. The current holding is 600, so the entitlement is for an additional 150 shares at a cost of £240. The number of shares in column six rises to 750; the total cost rises to £685.40 and the average cost becomes 91 p. The decisions made by the club in the above example are not the only options available. in the case of the capitalisation issue. the club could have decided to sell these bonus shares immediately. If this course is followed, adjustments should be made on the investment Record to reduce the total cost of the retained shares by the net amount received for the bonus issue. In the case of the rights issue, provided that a buyer is available, the club could have sold its right to the new shares ’nli paid’. The club will receive the premium based on the difference between the market value of the new shares and the price at which the company is offering them. On the Investment Record the total cost of the retained shares will be reduced by the net amount received by the sale of the rights issue. ProShare Investment Club THE MANUAL ...
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