Week 10 - Week 10: Sources of Funds: Rights Issue, Private...

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1 Week 10: Sources of Funds: Rights Issue, Private Placement, Bonus Issue and Dividend Reinvestment Cameron Truong Subsequent equity raising (Seasoned) • Once the firms are listed on the stock exchange, the avenues to raise additional funds widen. • Firms periodically review their capital structures, possibly due to a new project is being considered; debt is nearing maturity; and value maximization is being assessed. Subsequent equity raising • The basic alternatives to raise subsequent funds are debt and equity. The choice probably depends on, among others, the type of assets the firm owns; the firm’s ability to service interests and dividends; existing covenants e.g. earnings after tax must be four times greater than interests; and plans and liquidity of major shareholders; Assuming the choice is to raise additional equity, the firm can do so by Rights issue Private placement Dividend reinvestment plan
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2 Rights • With rights, existing shareholders have the privilege to buy a specified number of new shares from the firm at a specified attractive price within a specified time . • Each shareholder receives an entitlement to new shares at a fixed proportion of the number of shares that they own. • Rights can be renounceable or non-renounceable. • The issue price is often 10-30% discount to the share price at the time the issue is announced. Rights – A chronology Announcement date Ex-rights date Cum-rights share price = $20 Value of a right-per-share = $3.33 Ex-rights share price = $16.67 Rights • To issue rights, the financial manager needs to consider, among others: subscription price per new share; the number of new shares to be sold; the value of the rights; the effect of the rights on the value of the current share; and the effect of the rights to existing and new shareholders.
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This note was uploaded on 10/08/2011 for the course FINANCE 101 taught by Professor Jannis during the Three '11 term at Monash.

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Week 10 - Week 10: Sources of Funds: Rights Issue, Private...

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