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Suppose a private co, who has floated 10% of shares in share market wish to raise rights issue. The par value of share is 1 dollar and market price is 2 dollar. Will they issue the rights shares at par value or market price?
Suppose a public co like Microsoft wish to raise additional capital by issuing shares. Do they have to consider the existing share structure? Means, do they have to raise rights issue or just do public offering?
A company can have a rights issue at any price they want. However they will normally offer the shares at a price a little less than the current market value in order to encourage shareholders to buy them. The par value is of no relevance at all.
If a company issues shares, then the capital structure will end up the same whether it is a rights issue or a public issue. The benefit of having a rights issue as opposed to a public issue is that the issue costs are a lot lower, but the amount they can raise is more limited than if they have a public issue. What they decide to do depends largely on the amount of extra share capital they wish to raise.
It will help you to watch the F9 lectures on this, since this is largely revision of F9.
@johnmoffat said:
If a company issues shares, then the capital structure will end up the same whether it is a rights issue or a public issue.
Do public companies have to consider existing shareholding (not the change in capital structure)? That was my doubt.
thanks
You said in your question “means, do they have to raise rights issue or just do public offering”, and that was what I answered – it makes no difference in terms of the effect on the capital structure.
Whenever a company raises finance, whether from equity (whether rights issue or public issue) of from long-term debt borrowing, then they need to consider the effect on the capital structure. According to Modigliani and Miller, best is to raise as much from debt borrowing as possible because of the tax saving on the interest.
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