In Chapter4 (Example 4.2 ) the point was made that issuing new shares at below their current
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In Chapter 4 (Example 4.2 ) the point was made that issuing new shares at below their current value is to the benefit of new shareholders and to the detriment of existing ones. In view of this, does it matter that rights issues are always made below the current value of the shares?
Data from Example 4.2
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Based on future prospects, the net assets of a company are worth £1.5 million. There are currently 1 million ordinary shares in the company, each with a nominal value of £1. The company wishes to raise an additional £0.6 million of cash for expansion and has decided to raise it by issuing new shares. If the shares are issued for £1 each (that is, 600,000 shares), the total number of shares will be: 1.0m + 0.6m 1.6m and their total value will be the value of the existing net assets plus the new injection of cash: £1.5m + £0.6m = £2.1m This means that the value of each share after the new issue will be: £2.1m/1.6m = £1.3125 The current value of each share is: so the original shareholders will lose: and the new shareholders will gain: = £1.5m/1.0m = £1.50 £1.50 £1.3125= £0.1875 a share - £1.3125 £1.0 = £0.3125 a share The new shareholders will, no doubt, be delighted with this outcome; the original ones will not.
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Accounting And Finance For Non Specialists
ISBN: 9781292334691
12th Edition
Authors: Peter Atrill, Eddie McLaney
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