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Hello Sir ,
I don’t understand that why the shareprice following the right issue falls
and if the existing shareholder refuses to take up the right he would suffer loss again Why?
.it suddenly popped into my head while doing bpp revision kit q 39 which required to explain different options the existing shareholders have regarding the right issue and their effect on the shareholder wealth.
RegardsRights issues are generally at a price lower than the existing market value of the shares.
So if they take up the rights issue, they own more shares but some were bought at a lower price. For the theoretical ex-rights price, the shareholder makes no gain/no loss and therefore the price of each share must be a bit lower than it was before.If you watch my lecture on this you will see an explanation of this with numbers.
This also explains why it is that if they do not take up the rights issue, the shareholder makes a loss – they end up with the same number of shares as before, but the share price of each is a little lower.
(In practice, they would see their rights if they did not want them and so would not make a loss – again see my lecture for an example of this.)
Also, in practice, the final share price will probably end up being higher than the theoretical ex-rights price, because shareholders will be expecting the money raised to be invested well by the company. The theoretical ex-rights price ignores this.
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