Plan:
Methods of rising additional equity finance:
Retained profit
Factors
Rights issues
The importance of the rights issue price
Factors to consider in respect of rights issues
Equity issues to the public
Pricing of issues to the public
Factors to consider in respect of equity issues to the public
Methods of rising additional equity finance
There are broadly three ways of raising new equity finance. These are retaining profits rather, making issues of new shares to existing shareholders and making new share issues to the public.
1.Retained profit
Rather than paying them out as dividends, is effectively a way of raising finance. In fact retained profits are a very important source of finance, probably accounting for about half of all the long-term finance raised by UK businesses over recent years.
Factors to consider in respect of raising finance by retention of profits
Does dividend policy affect the net wealth of the shareholder?
No issue costs.
Profits are uncertain.
No dilution of control.
2. Rights issues
These are offers to existing ordinary shareholders to take up additional shares, for cash, at a price usually significantly below the current market price of already existing shares.
Rights issues have generally represented by far the most important method of rising new equity finance in the UK, after retained profits, over recent years.
Once the bossiness has decided on the amount of finance it needs and has set a price, it simply offers shares to existing shareholders.
The importance of the rights issue price
Businesses typically price rights issues at about 21 per cent below the current pre-rights share price. As we have seen, doing this should not really advantage the shareholder.
Factors to consider in respect of rights issues
Rights issues are a relatively cheap way of raising equity finance.
Pricing of issues is not a critical factor.
Rights issues are fairly certain.…
