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Sir why can a rights issue only reduce gearing in book value terms and not market value terms in circumstances where cash raised is not used to pay off loans/debt. I understand that share value will be reduced but still it must have some impact on MV gearing right?
The theoretical ex-rights price will result in the total MV of the shares being unchanged (more shares, but all at a lower MV) and will therefore have no effect on the MV gearing.
(If you have not watched my lectures on rights issues then do – I explain the above in the lectures)
However, the actual ex-rights price will depend on how well or badly the money raised is invested (in new machines etc.). If the money is being invested well, then this will increase the MV of the shares above the TERP and the MV gearing will reduce – but this is because of the new investment, not because of the rights issue itself.
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