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  1. Sir, if he X has sold 200 rights, does it mean that the payer (acquirer) has taken up the 200 shares? definitely right? so he has to pay X cash 300 (200 x 1.5) for the rights and pay the company 1500 ( 200 x 7.5).

    am i right?

    • First, X does not end up with 1200 shares at $8 and 200 at $6. All 1400 shares are at the TERP of $7.50.

      Second, they are not selling 200 shares – they are selling the rights and $300 is a receipt of cash not a payment.

      Third, they have to pay for the 200 shares that they take up at $6 each, which is $1,200.
      So the net cash paid is 1200 – 300 = 900.

      I do think that you should watch the lecture again.
      ………………………………………………………………………………………………………………..
      regarding your comment on this.

      Sir, if he X has sold 200 rights, does it mean that the payer (acquirer) has taken up the 200 shares by then? this means he has to pay X cash 300 (200 x 1.5) for the rights and pay the company 1500 ( 200 x 7.5).

      am i right?

  2. Hi Sir,

    As far as i am concerned, one of the reasons why companies use right issue method instead of public issue is that they dont want to break the structure of the company or remain the number of shareholders. So in this case, shareholders are not entitle to sell their rights to outsiders but to other shareholders, is my thought right?

    Thank you very much for your enthusiasm.

    • It depends on the rules of the company. For public companies, shareholders are able to sell their rights. Having a rights issue makes sure that the gains go to existing shareholders and that existing shareholders have the first chance to buy new shares. It is also a much cheaper way of issuing equity finance that having a complete new issue.

  4. Hello sir,

    Thank you for your good explanation, its really making sense for me and I do get much from your explanation.
    In example 2, Mr. X owns 1200 share, the market price was $8, the current wealth is 1200*8 = $9600

    new wealth as I did my calculation which I know is not the right one is:
    1400*7.5 (i.e the theatricality ex-right price for the half taken and the previous 1200 share he owns) = $105.
    200*6 (i.e the cash paid the right taken up) = (1200)
    200*7.5 (i.e the cash received from selling the other half) = $1500
    so this will be

    1400*7.5 = 10500
    200*6 = (1200)
    200*7.5 = 1500
    ——-
    effect = $10800

    what I want to know which I think I am missing is that why you said the sell of rights is 1.5 instead of 7.5.

    I know the right value is 1.5 but I thought it should effect in same way for both taking up and selling and because you used 1200+200 taken up for 7.5 which is the TERP it will also do the same for the parts sold.

    sorry for not making my question very clear

    • Two things:

      First, although selling the rights is arithmetically the same effect as taking up the rights and then selling the shares, but that is not what happens in practice – you sell the rights letter for 1.50 (and whoever buys it then takes up the rights).

      Secondly, the reason your final total is wrong is because you have not brought in the cost of the 200 rights that they do actually take up.

      • Sir, thank you very much for your lectures.
        I have one question , you mentioned this in your reply: ” (and whoever buys it then takes up the rights)”
        my question is : whom do they pay after they take up these shares. Don’t they pay to one, that sold the letter to them? or do they pay to entity?

      • They pay to the shareholder selling the rights, the value of the rights. That then gives them the right to buy the shares at the lower price and this money they pay to the company.

    • I assume that you are asking about example 2.
      If so, then they already own 1,200 shares and are therefore entitled to rights of 400 shares.
      I show in the lecture what happens if they take up all the rights.
      If they sell all the rights, then they will still have 1,200 shares and these will be worth 1,200 x $7.50 = $9,000.
      They will sell the rights, and receive therefore cash of 400 x $1.50 = $600
      So the total wealth = 9,000 + 600 = $9,600

  7. Sir,
    In example 2 part c.
    X’s wealth is (1200 shares * $8 + 200 * $6) = $ 10,800
    And as we are selling the other 200 shares, we gaining $1.5 for every share we sold. So 200 shares * $1.5 = $300.
    Now as I set off, it would be $10,800 – $300 = $10,500.
    I know I’m wrong when I do this way, but I don’t understand why you deducted $900 instead of $300?

    Thankyou.

  9. Hi Sir

    Could you let me know if my understanding is right?

    In theory the shareholders will end up neither better off nor worst off, then why would they bother taking up the rights issues? Is that because if they don’t take up the rights issues, other shareholders might do and it would drive down the share value anyway so they would be worst off if they don’t take up the rights issues?

    I hope my question make sense ??

    Thanks

    • As I do explain in the lecture, the new share price will likely be higher in real life than the TERP (depending on where the company is investing the money that is raised from the rights issue). Therefore the shareholders are likely to end up being better off.

      • Hi Sir

        I appreciate that in real life the market price could be higher than the TERP but what if some shareholders decide not to take up the rights issue. The market value of the share would be diluted due to the extra shares issues. So they’d better take up the rights issue to protect their holdings?

        Thanks for your time.

      • If they want to retain the same % holding, then yes – they need to take up the rights. However, if they don’t take up the rights then can sell them. If just depends whether they want the benefit in more shares, or in more cash, or in a combination of the two. I do go through examples in the lectures showing the various options that they have.

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