How a company can raise extra cash with a rights issue

Julie Brownlee, Fsp Invest, 20 Oct. 2014

Tags: rights issue, what is a rights issue, terp, nil-paid, shares, shareholders,



One of the main reasons why a company lists on the stock market is so they can raise capital by selling shares in their business.

But it doesn’t stop there. If a company needs more cash, it can try to raise more through a rights issue.

So what is a rights issue? How does a rights issue work? And what happens if a shareholder doesn’t want to take up the rights issue?

Let’s take a closer look…



What is a rights issue?


If a company that has a listing on the stock market wants to raise more money, it can issue new shares.

A rights issue is when a company gives its existing shareholders the right to buy new shares in the company in proportion to what they already hold.


How a rights issue works


Let’s go through an example to show how a rights issue works in practice…

Company ABC has decided to opt for a rights issue. It’s a nine for ten rights issue

This means an existing shareholder can buy nine new shares for every ten they own.

To try to encourage shareholders to take up the offer, the rights are usually at a lower price than the current share price.

Let’s say Company ABC’s shares are trading at R2.45 and it prices its rights at R1.25.


When shareholders don’t want to take up a right offer


If you decide not to take up the offer to buy more shares, you can opt to sell some or all of your rights. This is selling the rights ‘nil paid’ as nothing has been paid for them so far.

If you want to calculate the value of the nil-paid rights, you need to calculate the theoretical ex-rights price (TERP).

For our Company ABC example, this is R1.88.

You work this out by (R2.45 x 10) + (R1.25 x 9), which gives R35.75. Divide that figure by 19, which gives R1.88.

The value of the nil paid is then the TERP minus the rights price (R1.88 – R1.25), which is R0.63.

So there you have it, how a company can raise extra cash with a rights issue.

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