Malindi Leisure Industries is already highly geared by industry standards, but wishes to raise external capital to finance the development of a new beach resort. Outline the arguments for and against a rights issue by Malindi Leisure Industries.

CPA-Financial-Management-Section-3 Revision kit

Benefits of a right issue to Malindi Leisure Industries;
The company is highly geared as rights issue would reduce the level of gearing and reduce in the level of financial risk.

If the issue is successful it will not significantly change the voting structure.

If underwriters are raised then the amount of finance that will be known and guaranteed

If the market is high, Malindi Leisure Industries should be able to achieve a rights issue at a relatively low cost since less shares will be issued. (Lower floatation costs)

Less administrative procedures e.g no need for prospectus.

Drawbacks of rights issue
The issue will need to be priced at a discount to the current share price in order to make it attractive to investors. Thus will result in a dilute in earnings and a fall in price.

If the issue is not successful, a significant number of shares may be taken by underwriters thus changing the voting structure

Administration and underwriting costs are high

Shareholders may be unable or unwilling to increase their investment in Malindi Leisure Industries

Leave a Reply

Your email address will not be published. Required fields are marked *