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November 29, 2015 at 12:20 pm
When I am paying $3 for one share in a rights issue I am investing my money so I would obviously want to end up being better off than before ie more than the $20 that I was worth before but you say that in theory I should end up with exactly what I was worth before the rights issue?
Could you please explain?
John Moffat says
November 29, 2015 at 2:06 pm
You would want to be better off but how much better off depends on what the company does with the money i.e. how they invest it.
The TERP is what the market value would need to be if the company did not invest the money. As I state clearly in the lecture, the actual ex-rights price would usually be higher because of how the company is using the money raised.
January 16, 2015 at 4:26 pm
Thanks John. The vita example is making whole lot of sense. What am understanding is that by selling her rights, she benefits/earns 1.6 for every share she has sold!! Am I right?
January 16, 2015 at 5:29 pm
But selling rights is not selling shares. The ‘right’ is a piece of paper that gives you the right to buy shares at a lower price. You can either use the rights to buy some more shares, or you can sell the rights. If you sell the piece of paper (the ‘rights’) then you can sell if for (in theory) $1.60. The reason people will pay $1.60 for the piece of paper is that the person buying it would then have the right to buy shares at a low price.
May 17, 2015 at 11:28 pm
sir i donot know where i misunderstood i have a little confusion here
if someone pays $1.60 for the right he gets the right to buy shares at a low price i.e $3 so effectively he has paid $4.60
although he can get those directly from the stock exchange for the same price
May 18, 2015 at 9:35 am
Yes – and I say this in the lecture!
I also say that this is why in practice the value of the rights will usually be a little lower than the $1.60 – to encourage people to buy it (otherwise they might as well buy the share directly on the stock exchange).
January 7, 2015 at 8:45 am
In real life usually the share price is higher , can you please give anothet example for it
January 7, 2015 at 8:54 am
It is not a question of examples – it is a fact! The theoretical ex-rights price ignores the fact that the company will normally be investing the money in expanding and making a gain for the shareholders. As you know from earlier lectures, the share price is always based on future expectations and so if shareholders expect that the money raised will be invested well then the actual share price will be higher than the TERP.
April 27, 2014 at 5:04 pm
Great, For the first Time I clearly Understood the Logic Behind Rights Issue, Thanks Alot Sir John
April 27, 2014 at 6:03 pm
Thats great – thanks
April 26, 2014 at 11:59 pm
Great lecture on sources of finance. Right Issues clearly understood now.
April 27, 2014 at 8:31 am
September 30, 2013 at 8:05 pm
Fantastic explaination.. I have never been able to understand this rights issue. Can’t wait to start practice questions.. million thanks for this!!!!!..
September 12, 2013 at 5:00 am
Very nice lecture indeed. I find the sources of finance topic very interesting!
November 1, 2012 at 8:22 pm
…if rights issue is for existing s/holders only ,- how can Vita buy the letter-rights? or how can she buy the rights at 4.60 directly on the market exch … referring to point made that in real life the value of rights probably be lower at 1.58 rather than 1.60 as per calculation
I am very puzzled by this, could you please clarify, the rest is clear as water , thank you , really glad I found this website!
November 2, 2012 at 6:13 am
@balcune1, Although the offer of new shares is made to existing shareholders, the shareholders can sell the letter (the rights) to other people.
Vita can buy the shares directly on the stock exchange at the ex-rights price and so there would be no point in real life for her to buy the rights at 1.60 and then buy the shares by paying 3.00 to the company – it would be less hassle for her simply to buy the share on the stock exchange for the same total cost!
To encourage people to buy the rights, they would be priced slightly lower.
November 19, 2012 at 5:53 pm
@johnmoffat, But, if it’s a rights issue, will it be quoted on the stock exchange :S Or will it be offered to existing shareholders only?
November 19, 2012 at 6:52 pm
@abeers, Although the rights are offered to existing shareholders, the new shares are the same type of shares as the existing shares and will continue to be quoted on the stock exchange.
@John Moffat, The stock exchange is simply where existing holders of shares are able to sell their shares to other people.
February 26, 2015 at 10:03 pm
@johnmoffat Hello John, In case the existing shareholder does not use the letter to buy the share and also don’t sell it. Is there a due date before these shares could be offered directly to the public, please.
February 27, 2015 at 9:31 am
The company does not offer the shares directly to the public.
What usually happens is that if the existing shareholder does not take up the rights and does not sell them, then the company will automatically sell the rights for them on the stock exchange and pay the money to the existing shareholder.
As far as time limits are concerned, I am pretty sure there is no legal time limit – it is up to the company to set a deadline when they make the rights issue – however that is completely irrelevant for F9 (you are not required to know any law).
February 28, 2015 at 7:23 pm
Thank you very much for the answer, John.
May 7, 2012 at 1:23 pm
perfect lecture easy to understand thanks OT
March 6, 2012 at 5:07 pm
it is a very good lecture indeed
February 20, 2012 at 4:27 pm
Perfect lecture indeed and thank so very much!!! Is it possible to check the duration of this and other lectures?
November 9, 2011 at 9:59 am
Best for sure
October 31, 2011 at 11:52 am
simply the best lectures….thank you so much!!!
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