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  1. avatar says

    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?

    • Profile photo of John Moffat says

      Almost :-)

      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.

      • avatar says

        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
        thanks

      • Profile photo of John Moffat says

        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).

    • Profile photo of John Moffat says

      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.

  2. avatar says

    …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!

    • Profile photo of John Moffat says

      @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.

      • Profile photo of abeers says

        @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?

      • Profile photo of John Moffat says

        @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.

      • avatar says

        @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.

      • Profile photo of John Moffat says

        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).

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