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Hello, John. I know the answer to the following question is “1 and 2 are incorrect”. But I don’t understand why 3 is correct. Why does dilution not occur if the existing shareholders take up their rights but do in the opposite case?
13.11 Which of these statements about limited liability companies is/are correct?
1 A company might make a bonus issue of shares to raise funds for expansion.
2 No cash is received when a company makes a rights issue of shares, instead other reserves
(usually share premium) are capitalised and reclassified as share capital.
3 A rights issue of shares dilutes the shareholding of existing shareholders if they do not take up
their rights.Suppose that the company has 1,000 shares in issue, and you own 100 of the shares. You own 10% of the company.
Suppose that the company has a 1 for 5 rights issue, so there are now 1,200 shares,
If you take up your rights, then you have 120 shares. So you still own 10% of the company.
However if you do not take up your rights (so then they go to someone else) you still only have 100 shares and so you now only own 100/1,200 = 8.33% of the company. That is what is meant by your shareholding having been diluted.
So If I don’t take up my rights, the rights will definitely go to someone else(ex I can sell the rights to someone else?) instead of just expiring or something and disappearing in vain?
In that case, I understood.
Thank you!
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