Company A and Company B operate in the same industry but are quoted on different countries'...

 

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Company A and Company B operate in the same industry but are quoted on different countries' stock markets. Both companies announce to their respective stock markets on the same day that they intend to have a rights issue and state the offer price that will be used under that issue. Company A's offer price is 30% lower than their current share price (as at the date of the announcement), whilst Company B's offer price is only 10% below their equivalent share price. Neither company is underwriting their issue. a) Explain why the offer price in both cases was set below the current share price at the point of the announcement. b) Suggest reasons why the size of the discount is different for the two companies. [4 marks] [4 marks] Company A is having a 1-for-10 rights issue and Company B is having a 3-for-7 rights issue. When expressed in the same currency, both company's share prices are identical at the date of the announcement. c) By considering the theoretical ex-rights share price, prove algebraically which company would expect to have a higher share price immediately after the completion of the issue. [To be clear, you should ignore the impact of market sentiment, exchange rate movements and the expenses of the issues.] [4 marks] [Total: 12 marks] Company A and Company B operate in the same industry but are quoted on different countries' stock markets. Both companies announce to their respective stock markets on the same day that they intend to have a rights issue and state the offer price that will be used under that issue. Company A's offer price is 30% lower than their current share price (as at the date of the announcement), whilst Company B's offer price is only 10% below their equivalent share price. Neither company is underwriting their issue. a) Explain why the offer price in both cases was set below the current share price at the point of the announcement. b) Suggest reasons why the size of the discount is different for the two companies. [4 marks] [4 marks] Company A is having a 1-for-10 rights issue and Company B is having a 3-for-7 rights issue. When expressed in the same currency, both company's share prices are identical at the date of the announcement. c) By considering the theoretical ex-rights share price, prove algebraically which company would expect to have a higher share price immediately after the completion of the issue. [To be clear, you should ignore the impact of market sentiment, exchange rate movements and the expenses of the issues.] [4 marks] [Total: 12 marks]

Answer rating: 100% (QA)

Rights Issue and Offer Price 12 marks a Reasons for Offering Below Current Share Price 4 marks Companies set the offer price in a rights issue below t... View the full answer