ACCT 210 Lecture : rights.docx

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14 Jan 2013

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A rights issue is an issue of new shares for cash to existing shareholders in proportion to their existing holdings. A rights issue is, therefore, a way of raising new cash from shareholders - this is an important source of new equity funding for publicly quoted companies. Legally a rights issue must be made before a new issue to the public. This is because existing shareholders have the right of first refusal (otherwise known as a preemption right ) on the new shares. By taking these preemption rights up, existing shareholders can maintain their existing percentage holding in the company. However, shareholders can, and often do, waive these rights, by selling them to others. Shareholders can also vote to rescind their preemption rights. The price at which the new shares are issued is generally much less than the prevailing market price for the shares. A discount of up to 20-30% is fairly common.

Related Questions

Do you agree or disagree with the following post belowfrom a classmate? Please exaplain with cited sources in the bodytexts and reference. Thank you!

Issuing common stock helps a corporation raise money. Thatcapital can then be used in a number of ways to help the businessgrow, such as to acquire another company, pay debts or to simplyhave access to more cash for general corporate reasons. Companiesmust decide, however, whether issuing common stock is really worthit. Issuing additional shares into the financial markets dilutesthe holding of existing shareholders and reduce their ownership inthe corporation.

Pros

Issuing common stock in the financial markets is an alternativeto issuing debt. Rather than adding more debt to a company'sbalance sheet, which is a financial statement, and budgeting forthe servicing of debt, a company can take a less expensive routeand issue common stock. With stock, an organization does not needto make obligatory interest payments to investor and instead canmake discretionary dividend payments when it has extra cash.

Cons

By selling additional common shares into the financial markets,a company is increasing the number of outstanding shares. When thenew shares enter the market, they dilute the ownership of existingshareholders, according to " The Global issues blog and FinancialAccounting book 9th ed, Pearson." One of the perks of being acommon shareholder is the right to vote on important companydevelopments. Once a greater number of common stocks are sold inthe market, an existing shareholder's ownership stake and votinginfluence diminish. Companies sometimes avoid issuing more commonstock as a courtesy to existing shareholders.

Reference:

The GlobalIssuesBlog,8 Big Advantages and Disadvantages ofcommon Stocks, retrieved 03 April 2017 fromhttp://connectusfund.org/8-big-advantages-and-disadvantages-of-common-stocks

Harrison, W. T.,Horngren, C. T. & Thomas, C. W. (2013).Financial Accounting (9^th ed.) Upper Saddle River, NJ:Pearson Education, In

ACCT 210 Lecture : rights.docx

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