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Hi John,
I have the following solution from you for the above question below:
There is no need to type out the whole question – I wrote the lecture notes and so I have a copy of the question ?
There is a bonus issue of 1/2 x 100M = 50M shares. So there are now 150M shares in issue, and share capital increases by 50M and share premium decreases by 50M.
There there is the rights issue of 2/5 x 150M = 60Mshares. So share capital increases by 60M and share premium increases by 60M x (1.50 – 1.00) = 30M.
So the end result is that share capital = 100 + 50 + 60 = 210M
and share premium = 80 – 50 + 30 = 60M(as per the answer printed in the free lecture notes)
I am struggling to understand why share capital decreases by 50m and why share premium decreases by 50m. (bonus issue) and then why they both increase with the rights issue?
Many thanks,
Faisal
Hi John,
Further to my question above, I just had another question.
What would happen to the share premium amount if in the question the ordinary shares had been valued at 50c each?
Thanks
There is no point in using the lecture notes without watching the free lectures. It is in the lectures that I explain and expand on the notes, and work through the examples (including this example).
Where a rights issue or a bonus issue, there are more shares being issued and therefore the share capital increases.
With a bonus issue the shareholders are not paying for them, therefore they cannot be owed any more in total, and therefore share premium has to reduce.
With a rights issue, the shareholders are paying for the shares, and therefore they are owed more than before. Any excess payment over and above the nominal value goes to the share premium reserve.The value of ordinary shares is not relevant. I think you are asking what happens if the nominal value is 50c. In which case it is the same rules as above except the increase in share capital is number of shares issued multiplied by 50c.
For a full explanation you must watch the free lectures – I cannot type them all out here 🙂
Thank you for the explanation. So just to clarify with the rights issue, does the share premium and share capital always increase?
Also, if the nominal value was 50c, you would do 60M x (1.50-0.5) is that correct?
Share capital always increases.
Share premium will increase provided that the issue price is higher than the nominal value (which will normally be the case)/
Yes – that would be correct.
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