1. 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!)

  2. 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..

  3. 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?

  4. 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.

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