CIMA F2 Syllabus A. Financing capital projects - Equity as finance - Notes ^{5 / 13}

Rights Issue	For existing shareholders initially	No dilution of control
Placing	Fixed price to institutional investors	Low cost - good for small issues
Public	Underwritten & advertised	Expensive - good for large issue

For existing shareholders initially - means no dilution of control

A 1 for 2 at $4 (MV $6) right issue means….
The current shareholders are being offered 1 share for $4, for every 2 they already own.
(The market value of those they already own are currently $6)

Calculation of TERP (Theoretical ex- rights price)
The current shareholders will, after the rights issue, hold:
1 @ $4 = $4
2 @ $6 =$12
So, they now own a total of 3 for a total of $16. So the TERP is $16/3 = $5.33

Obviously this will fall as there are now more shares in issue than before, and the company has not received full MV for them

To calculate the exact effect simply multiply the current EPS by the TERP / Market value before the rights issue
Eg Using the above illustration
EPS x 5.33 / 6

There is no effect on shareholders wealth after a rights issue.
This is because, although the share price has fallen, they have proportionately more shares
Equity issues such as a rights issue do not require security and involve no loss of control for the shareholders who take up the right

An unquoted company can obtain a listing on the stock market by means of a:

Initial public offer (IPO)
When a company issues shares to the public for the first time.
They are often issued by smaller, younger companies looking to expand, or large private companies wanting to become public.
For the individual investor it is tough to predict share prices on the initial day of trading as there’s little past data about the company often, so it’s a risky purchase.
Also expansion brings uncertainty in any case
The transparency required for a public listing may lead to revealing sensitive information that a company may prefer to keep private. Also, the regulatory requirements for reporting and disclosure add significant workload and costs for a company.
Placing
Is an arrangement whereby the shares are not all offered to the public.
Instead, the shares are bought by a small number of investors, usually institutional investors (such as pension funds and insurance companies).
This means low cost - so good for small issues
Placings are likely to be quick.
Public Issues
These are underwritten & advertised.
This means they are expensive - so good for large issue

By this method of obtaining a quotation, no shares are made available to the market, neither existing nor newly created shares; nevertheless, the stock market grants a quotation.
This will only happen where shares in a large private company are already widely held, so that a market can be seen to exist.
A company might want an introduction to obtain greater marketability for the shares because it enables holders of existing shares to trade their shares more easily to a wider pool of potential investors on the new market that the company has been introduced on to.
As no new shares are issued and therefore the company is receiving no new cash, an introduction will not need to be underwritten by an issuing house.