The document discusses a rights issue by company XYZ where shareholders receive new shares in a 5:2 ratio for every 5 existing shares. For a shareholder with 100 shares, this entitles them to purchase 40 new shares at a discounted price. Taking no action would dilute the value of their holdings. Shareholders have the option to purchase all, some, or none of the new shares, or sell their entitlement in the rights issue.
The document discusses a rights issue by company XYZ where shareholders receive new shares in a 5:2 ratio for every 5 existing shares. For a shareholder with 100 shares, this entitles them to purchase 40 new shares at a discounted price. Taking no action would dilute the value of their holdings. Shareholders have the option to purchase all, some, or none of the new shares, or sell their entitlement in the rights issue.
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The document discusses a rights issue by company XYZ where shareholders receive new shares in a 5:2 ratio for every 5 existing shares. For a shareholder with 100 shares, this entitles them to purchase 40 new shares at a discounted price. Taking no action would dilute the value of their holdings. Shareholders have the option to purchase all, some, or none of the new shares, or sell their entitlement in the rights issue.
Copyright:
Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOCX, PDF, TXT or read online from Scribd
Assume company XYZ has announced rights issue in the ratio
of 5:2 (for every 5 shares additional 2 shares are offered). If you hold 100 shares of XYZ, then, (100 * 2/5) = 40 You will be entitled to get 40 new shares of XYZ. The new shares are usually given at deep discount price so that the full issue gets subscribed and the company may raise the required capital. A future date is fixed for this corporate action. After this corporate action the share price comes down proportionate to the issue ratio, theoretically. Actual value differs from this theoretical value based on the intention of the funds’ raise. Consider, Share price of XYZ is Rs300 and the company is offering new shares at Rs200 and you hold 100 shares of XYZ. You can buy 40 shares at Rs200. The amount required to buy new shares is (40*200) = Rs8000. Value of the existing shares is (300 * 100) = Rs30000 Total value of 140 shares = (30,000 + 8000) = Rs38000 Theoretical share price ex-rights = (38,000 / 140) = Rs271.5 In case of rights issue you have the below options to choose. 1. No action at all. It’s not recommended since it dilutes the value of your existing shares. I.e. in the above example you would leave with (100 * 271.5) = Rs27150 (whereas the original value was Rs30000).
2. Opt to buy all the shares you are entitled to by paying
Rs8000. As explained above. You will have 140 shares with a theoretical price of 271.5 You can buy a part of the shares you are entitled to.
3. Opt to sell the shares to other investors or the
underwriter in which case theatrically you would get Rs10860 (271.5 * 40) and You need to pay Rs8000 (40 * 200). Capital gain is the difference (10860-8000) which is Rs2860.
Of course there will be capital loss on your existing 100