Rights issue

RECENT NEWS
The Australian  Dec 18  Comment 
BOART Longyear will raise $300,000 less than it planned, after amending its rights issue offer price from 16.56 cents to 16.50c.
Reuters  Dec 16  Comment 
U.S billionaire Bill Gates has fully subscribed to the share-buying rights on his 6 percent stake in Spanish builder and services group FCC as part of the company's rights issue, a...
Channel News Asia  Dec 15  Comment 
Del Monte Pacific is seeking to raise as much as US$515 million (S$676 million) through issuing preference shares and a rights issue.
The Hindu Business Line  Dec 9  Comment 
IL&FS Engineering and Construction Company has withdrawn its proposed rights issue application, through which it was looking to raise up to Rs 300 crore. The company had filed its dr...
Financial Times  Dec 8  Comment 
Proposed rights issue and interest put focus on Spanish construction services company
guardian.co.uk  Dec 8  Comment 
Company’s shares slump after refinancing includes deeply discounted cash call Russia-focused gold miner Petropavlovsk has lost more than a quarter of its value after unveiling a refinancing plan which includes a deeply discounted cash...
WA Business News  Dec 8  Comment 
Shares in Geopacific were up 9.3 per cent today as the company announced a $3 million rights issue, with the company planning to step up exploration activity at its Cambodian Kou Sa project.
The Hindu Business Line  Dec 5  Comment 
Wollongong Coal raises A$53.74 million, around 80.5% of the target
Mondo Visione  Dec 1  Comment 
Abu Dhabi Securities Exchange (ADX) announced the success of Eshraq Properties Rights Issues for existing shareholders which was listed on November 2nd, the start date of the trading period of rights issue, and ran until November 13, the end date...
Financial Times  Nov 30  Comment 
Planned £550m rights issue could be in jeopardy




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Rights Issue

Rights Issue is a secondary capital raising strategy by the company. It gives it's stockholders an option say 1:1 (i.e. one rights issued per stock held) for the outstanding common stocks.

Ex. Say an investor has 100 shares of a company at Rs. 10 per share with a total investment of Rs. 1000. The company's brokers informs him about the option as 1:1rights issued at Rs. 8 per share. The investor exercises the option and now get's 100 shares @ Rs. 8 each. Thus his total investment is now 8*100 + 1000 = Rs. 1800 with 100+100 = 200 shares. Average price of share = 1800/200 = Rs. 9.

If all the investors avail the option than the market price of the share would come down to Rs. 9 per share and the market cap of company for a total initial outstanding common shares of 1 million (now 2 million) would be Rs. 18 million from previous market cap of Rs. 10 million.

The EPS of the company halves if the capital raised is not used as the number of shares has doubled. If the capital raised is reinvested properly and the EBIT increases than the EPS also changes accordingly.

Investor use

As used by the investor, these are an offering of shares issued at a special price by a company to its existing shareholders in proportion to their holding of old shares. [1]

Investors in common stock occasionally receive rights offerings to purchase additional common stock below the existing market price. The stock rights were probably issued to satisfy the investor’s preemptive right to maintain an existing level of ownership in the company. Rights are issued below the existing market price to encourage the exercise of the rights. The rights are separate having their own markets. [2]

From "morally correct," "just, good, fair, proper, fitting, straight," to put right" "just, righteous, wise "honest, morally upright "just claim" "in a proper manner" [1]

References

  1. ‪Wall Street words: an A to Z guide to investment terms for today's investor‬ By David Logan Scott pg318
  2. Wiley CPA Exam Review 2010: Financial Accounting and Reporting by Patrick R. Delaney and O. Ray Whittington ISBN-10: 0470453516 pg585
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