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Sources of Finance – Equity – ACCA Financial Management (FM)

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  1. Hi Sir, wouldn’t it make more sense to say each share is WORTH $5 but the right makes it COST $3 hence after the rights they will be worth $5 each still. It is technically the same share.

      • No – that is not true.

        The shares will be worth $3, but they will own more shares. The earning per share will be lower, but again they will own more shares.
        Their total worth and their total earnings will, in theory, not change.

    • It depends on whether the question asks for the value of a right for each new share or (more often) for the value of a rights for each existing share. The approach is the same regardless.

      • But how will that change my portfolio? example I had 100 shares(currently @$5 ) portfolio = $500( I had the option for 1 – 5 right shares @$3 issue). Then the terp would be $4.6. since I didnot take the option my portfolio now would be $460. if like you said the company would sell it on my behalf would I get the remaining 40 through value rights?

  4. Dear Sir,

    Is there any use of the value of rights per existing share? You always use “value of rights/new share”.

    I want to know if there is any specification where the value of rights/existing share should use?

  5. hello sir, may I know why we use $1.5 as price of right share?
    I thought Mrs X could have sell the 200 right issue at $7.5?
    And why would she buy the right issue at $6, and sell them at $1.5?

    Thank you in advance

  6. Hi sir.
    In example 2 part c if Mrs X. chooses to sell all of her rights issue wouldn’t that increase her net effect
    Current share price – 1200*8=9600
    Sale of rights – 400*1.50=600
    Is this right or am i missing something?
    You said that in theory because of the rights issue, the shareholder wouldn’t be better or worse of, so just wanted to clarify.

    Thanks.

  8. Hello sir,
    When we look at the effect of cash inflows and outflows of Mrs.X in ex.3, why dont we show outflow for the other 200 rights shares that we purchase in order to sell them? We show the sale of these rights but dont show the purchase. Why do we do that?

    Thanks in Advance.

    • We do not buy the rights – we are given the rights by the company.

      It is our choice whether to use the rights in which case we take up shares and pay for them, or instead to sell the rights so that someone else can use them.

  9. Hi John,

    With regards to the last part of the lecture, would it be correct to say that if we need a zero effect on cash, the percentage of rights we should take up is:
    (Value of a Right)/(TERP) x 100%

  10. HI JOHN.
    thanks for your amazing video lecturers, they are really helpful.

    can we say that the shareholders are investing the shares or taking up the rights issue in the expectation that the compony will do well in the feature so that they can earn more dividend. or on the other hand to not be diluted.

  11. Hi
    A quick quite question if you don’t mind. Why is so important that the net cash position won’t change when they purchase a new right share. I would think they are buying the share to get wealthier, hence their cash effect is zero, what short term benefits they have?

    or we assuming a long term benefit once company grows?

    many thanks in advance Anna

    • Either I am misunderstanding what you have written, or you have misunderstood the lecture a bit 🙂

      There is certainly no requirement that the net cash position should not change. Investors decide whether or not to buy shares (whether or not it is a rights issue) based on what they expect will happen to the shares in the future. However buying shares obviously involves paying out cash and it is quite common in the case of a rights issue that some shareholders do not want to pay out more cash but would rather receive some of the extra shares rather than sell all of the rights and receive cash. Because many shareholders do have this attitude, it is something that could be asked in the exam (and is asked in the specific example I work through) – how many of the rights should they take up and how many should they sell if they do want to have no change in their cash balance. However individual shareholders do not have to do this and we only do it in the exam if it is specifically asked for.

      • Hi John,

        thank you for coming back to me. Perhaps I should illustrate my question with an example to avoid misinterpretation.

        Taking the example 2 point C and D. I understand the calculation, however, I am confused with the purpose of the whole exercise. What is the point of taking up or selling the rights, if the shareholder is not better or worse off, as the net cash effect is zero? Is that because the shareholder thinking long term and not cash flow? Forgive me if I am being silly, but I just want to make sure I got this right. many thanks again Anna

      • The net cash effect is only zero in the case of part D of the example.

        Every shareholder has the choice of either paying out cash and getting more shares, of receiving cash but getting no extra shares, or any combination in-between. In theory their overall wealth (cash plus shares) will stay the same initially, but what they decide to do will depend on various factors such as do they have the cash available to buy more shares? What do they think will happen to the share price in the future? They are thinking long-term – for example they might choose to sell all their rights because they could use the cash they receive to buy shares in another company that maybe they think is a better investment for the future.

        The reason that any investor ever buys shares in any company is because they are hoping for future income or capital growth.

        Rights issues give flexibility to the shareholders – they have the chance of owning more shares in the company but they are not forced to buy more shares.

      • HI JOHN.
        At first thanks for your amazing video lecturers, they are really helpful.

        can we say the that the shareholders are investing the shares or taking up the rights issue in the expectation that the compony will do well in the feature so that they can earn more dividend.

  12. Hi Mr John, Thank u for your valuable and interesting lectures,

    regarding example 2 part c & d

    You said that in theoretical, there will be no change in the net wealth after buying the right share.

    in that applicable for all cases and what the logic behind that, I understand it in term of the numbers but I would really appreciate if you could explain the logic behind it to be more sense to me

    • If the owners (i.e. the shareholders) pay an extra $1,000 into the company then they will be owed $1,000 more by the company than they were owed before – that is basic accounting.

      However, as I explain in the lecture that only gives us the theoretical ex-rights price because it ignores what the company intends doing with the money raised.

  14. Hi Sir,

    I worked out part (d) differently by pausing the lecture to see if I get the same result, and I used a different methodology but obtained the same answer. Just wanted to check whether one could use the following working:

    $1.50 is the difference between the TERP and the rights price ($7.50-$6)
    $7.50 is the TERP

    The proportion of 1.50/7.50 is 20%, so 20% of the offered rights would be 80 shares.

    Thanks,

    Carl.

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