Advanced financial management revision question and answer

Advanced Financial Management Block Revision Mock Exams

(What are the advantages and disadvantages of a rights issue from the point of view of:
(i) The issuing company?
(ii) The shareholders?
ANSWER
(b) Advantages:
(i) Front point of view of issuing company

– Cheap to implement abridged prospectus, low advertising costs, simple application and allotment procedure.
– High probability of success. If the company did not have a good record it would not attempt a rights issue.

– Good publicity – could help any future public issue.

(ii) From point of view of shareholders.

– A two-way option; either to get extra shares in a good company at a cheaper price, or to cash on their rights.

– If successful, the voting power of existing shareholders is not diluted.

Disadvantages
(i) From point of view of the issuing company

– Issue price will be lower than might have been obtained in open market.

(ii) From point of view of shareholders

– In the short run the amount of earnings per share might be diluted leading to a temporary set-back in share price.
– The company would probably not risk this with a public issue.

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