1. avatar says

    thanks John for these wonderful lectures.
    Now my issue is this,example 2 in the topic of sources of finance-equity, why do we put a bracket on the “take up rights” when trying to find out the new wealth???

  2. avatar says

    Hi Mike

    Is this not annoying for shareholders they have to buy 20% then sell the rights of 80% and after doing all this messing around they only break even? Do right issues then not get a bad press? I own shares and have had a few right issue letters but so far have ignored them thus seems Im losing money but if I pay attention to them and take my time and act on these letters then at best I break even. Bit frustrating this am I missing something asI am not a big fan of spending time and effort to break even?

    • Profile photo of John Moffat says

      First, Mike does not teach F9! :-)

      Rights issues are very popular with shareholders. As I say in the lecture, the actual ex-rights price will usually be higher than the theoretical price (because shareholders usually expect the money raised to be invested well by the company), and therefore it will be better than breakeven – whatever they decide to do.

      Ignoring a rights letter will usually mean that the company will sell the rights for you and so you will receive cash, but you will end up owning a lower % of the companies shares. The beauty of rights issues is that you have the choice – pay in cash and own more shares, or take out cash and own less shares (in % terms). What shareholders decide depends much on what cash they have available and how optimistic they are about the companies growth in the future.

      PS buying 20% and selling 80% does not involve messing around – shareholders receive a form stating how many new shares they are entitled to. They simply fill in the relevant boxes for how many they want to buy and how many rights they want to sell.

      Taking up rights involves much less hassle than buying more shares on the stock exchange.

  3. avatar says

    Dear John,

    What is the difference between Bonus issues (Scrip issues) and Scrip Dividends. How does a company decides whether to go for Bonus or Scrip dividends?

    As I understand from the notes, in both free shares are issued and no cash inflows results to the company.


    • Profile photo of John Moffat says

      Bonus issues are where shareholders are given free shares.

      Scrip dividends are bonus issues except that they are given the free shares instead of a cash dividend (and are usually given the choice as to whether to take cash or shares).

      Scrip dividends are popular because they are effectively a way of raising finance in that if shareholders take shares instead of cash dividends then the company is saving cash that they would otherwise have had to distribute.

      Bonus issues on their own do not raise any finance and are simply a way of reducing the market value per share on the stock exchange.

  4. avatar says

    Dear John.
    I have just divided 1.5 to 7.5 and got right answer : 20 %. I also checked this way using different figures and answers were same again. I wonder whether I’m on right way or not. Thanks in advance :)

  5. avatar says

    Dear John,
    The rights issue wont make the the company’s share price to dilute( lower), since after offering rights the value of share falls? It will give loss to the shareholder, aside from theoretical assumptions.

    • Profile photo of John Moffat says

      The share price will be lower per share, but everyone will have more shares bought at a low price.
      In theory shareholders will make no gain no loss.

      In practice (as I say in the lecture) the share price will usually be higher than the theoretical share price, and shareholders will make a gain. The reason is that usually they will be expecting that the money raised will be invested well, which will increase the value.

      (If shareholders thought that they would make a loss, then nobody would take up the rights!)

  6. avatar says

    my connection with net is good, just in the middle of the course got msg “server not found :rtmpt:// . as you can read I sending you this msg, plz clarify what can be done. Thank you

      • avatar says

        I had a problem with the lectures initially, a friend told me it was due to spyware from other sites. Try downloading spybot (it’s free) and usually protects from spyware that stops lectures working.. It worked with me, and now I am getting ready to write F9, hope I will be ready..

        BTW Thanks for the clear and detailed lectures Mr Moffat..

  7. avatar says

    Mr John I’ve noticed another way of finding the correct percentage and I’d like to tell me if this is not always the case. . . .
    I say, the value right divided by the theoretical value has to give the right percentage and so $1.5/$7.5=0.2 or 20%. Would this not always be the case?

  8. Profile photo of Mahoysam says

    Dear Mr John,

    Perhaps my question is not really important for the exam, yet I’d like to ask it because I am kind of confused.

    As I recall from my F4 study, it is not legally allowed to withdraw funds from the Retained Earnings or the share Premium account, these two accounts/or reserves are treated exactly as the share capital account which is not allowed to be reduced but in certain conditions, yet I find here that the retained earnings is used as a source of finance to expand the company. Having said that, could you pls explain how is this possible/allowed to happen? and please correct me if I am wrong on the whole withdrawing funds from the RE account, perhaps I am mistaken on that and it is allowable.

    Many thanks!


    • Profile photo of John Moffat says

      You are confusing it with the accounting.

      The point is that the company is allowed to distribute the whole of their earnings as dividends.
      However, most companies do not do this – they distribute part of the earnings and retain the rest.

      The reason they retain is to use the cash to buy new assets and expand the company – however since the profits belong to the shareholders, by retaining some it is like borrowing more money from shareholders.

      If they pay dividend then the double entry is to credit cash and debit retained earnings.
      If they instead buy more assets and expand, the double entry is to credit cash and debit the asset account.

  9. Profile photo of sgsii says

    Hi Jon,

    Would it not be a bit quicker to do tis:

    400×20%=80 to buy (320 to sell)

    Tat’s what I did anyway and got the same answer…

    Thank you for very clear and informative lectures by the way!

  10. avatar says

    i watched this calculation,and understand,but when i am doing other quetion i cant solve it….my mind just blank….john plz tell me any logic how i prepare this topic…..

  11. Profile photo of manonaseriousmission says

    This video, as with others on OT, just goes to prove what I told a friend recently, that going to opentuition for clarity of explanation is a good step to take.
    My friend and I both study at a college where the lectures often seem so hard to understand and sometimes just plainly complicated; however once I get to O/Tuition, things become so clear I often wonder if it is the same topic I’d previously found so difficult in class. When you’ve got it, you’ve got it! John Moffat has certainly got it!!.. Thanks Open Tuition..

  12. Profile photo of lloyd says

    why are rights issue expensive when they a
    re retained by existing share holder? Example : when they are retained they are charged at $6 while they are to a new shareholder they are charged at $1.50?

  13. Profile photo of faheem100 says

    I am the early member of Opentuition. Now studying at Lsbf. Even Lsbf Interactive Videos Plateform n Ftc books failed to make these concepts. Only OT can make concepts 100% Clear. Thanks to OT

    • avatar says


      The rights issue of 1 new share for 3 existing ones… you divide 1200 for 3 = 400 and then it is said she takes up half her rights… so 400 (her rights) divided for 2.

      Hope it helps.

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