Learning Area 2

1. Learning Area 2 Chapter 6: Issue of shares Lecture 2

2. Issues made by companies already quoted p14 • Right issue • Issue to existing shareholders (want to raise new ordinary share capital) • Scrip issue • Issue shares without receiving money (dividends) • New loan/reference shares issued • Existing shareholders sells a large block of shares – offer for sale

3. 1. Rights issue p15 • 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. 1. Rights issue p15 • 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. 1. Rights issue: Impact on the share price p17 • 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. 1. Rights issue: Impact on the share price p18 • 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. Question 6.5 p19 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. 1. Rights issue p20 • 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. 1. Rights issue p22 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. 1. Rights issue p23 • 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. Homework • Question 6.5 – Calculating the ex-right share price • Example p22 Rights issue – effect on shareholder

12. Lectures going forward: • 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