Ordinary shares
Methods of issuing ordinary shares
Placing or selective marketing;
Issuance of shares to a select few firms and individuals.
Mainly used when issuing fewer shares.
Quicker and cheaper way of issuing shares.
Objective is to keep the costs of issuing shares down.
Katebe Moses Senior Lecturer Finance and Accounting (ZCAS) Email: [email protected] 2
Methods cont.
Public issue of shares;
An invitation to the general public to apply for shares in a firm.
Offer for sale or Initial Public Offering(IPO) is an invitation to
the general public to apply for shares at a fixed price.
Sale-by-tender: is an invitation to the general public to bid for
shares with the minimum price set.
The potential investors are required to quote the price and the
number of shares. 3
Katebe Moses Senior Lecturer Finance and Accounting (ZCAS) Email: [email protected]
Methods cont.
Rights issue of shares;
Issuance of additional shares to existing shareholders on a pro rata
basis and at a discount to the current market price.
Discount is meant to make the offer attractive to existing shareholders.
Offer helps existing shareholders to retain their influence in the firm.
Options available under rights issue are:
a. Take up the rights,
b. Sell the rights
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c. Allow the offer to lapse (do nothing)
Rights formulae
𝑻𝒐𝒕𝒂𝒍 𝒗𝒂𝒍𝒖𝒆 𝒐𝒇 𝒔𝒉𝒂𝒓𝒆𝒔∗
Theoretical ex-rights price (TERP)=
𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒔𝒉𝒂𝒓𝒆𝒔∗∗
*Total value of shares = value of old shares + value of new shares
**Total number of shares = # of old shares + # of new shares
Value of a right for:
o New shares = TERP – Subscription price
o Old shares= Market price - TERP
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Practice Q1
ERS Co is planning to raise additional finance through a 3-for-5 rights
issue of shares in order to support the firm’s expansion into the newly
created districts of southern province of Zambia. The current share price
is K4.00 per share while the new shares will be offered at K3.20 per share.
Currently, the firm’s share capital is K5,000,000 with a par value per
share of K0.50.
Required:
a) Determine the amount to be raised from this offer.
b) Calculate the theoretical ex-rights price.
c) Determine the value of ERS company post rights issue.
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d) Evaluate the post-rights issue position of an investor with 0.2% holding.
Solution (a)
Existing shares = K5m/0.5 = 10million
Offer 3-for – 5
Number of new shares = 10m/5*3 = 6m
Subscription = K3.20
Amount to be raised = 6m*K3.2 =K19.2m
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Solution (b)
5 old shares valued at K4.0 each =K20.0
3 new shares valued at K3.20 each = 9.60
8 = 29.60
TERP = Total value/Total shares
= K29.60/8 = K3.7
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Solution (c )
Market value post-rights issue (market capitalization):=
Total number of shares x TERP
= 16m *3.7 = K59.2m
Alternatively:
Value of old shares =10m*4 = K40.m
Value of new shares = 6m*3.2 = 19.2m
Total value = K59.20m 9
Question(d )
Evaluate the post-rights issue position of an investor that
currently holds 0.2% of issued shares assuming that
he/she;
i. Take up all the rights
ii. Sells all the rights
iii. Sells 40% of the rights and takes up the rest.
iv. Allows the offer to lapse. 10
Question(d )
Existing shares = 10m
0.2% investment = 10m*0.2% = 20,000 shares.
Offer 3-for-5
Number of rights = 20000/5*3 =12,000
Value of a right for new shares =TERP-subscription price =
K3.7 – K3.2 = K0.50
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Question(d )
Current position = 20,000 shares * K4.0 =K80,000
i) Investor takes up all the rights:
Total number of shares = 32000 (20000+12000)
Total value = 32000*3.7 = K118,400
Less cost of new shares (12000*3.2) = (38,400)
Net worth (post-rights issue position) =K80,000
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Question(d )
ii)Investor sell all the rights:
Total number of shares post-rights issue = 20,000
Total value = 20,000*3.7 = K74,000
Add proceeds from the sale of rights (12,000*0.5) 6,000
Net worth (post-rights issue position) = K80,000
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Question(d )
iii)Investor sells 40% (4,800) and takes 60%(7,200):
Total number of shares post-rights issue = 27,200
Total value = 27,200*3.7 = K100,640
Less cost of new shares (7200*3.2) = (23,040)
Add proceeds from the sale of rights(4,800*0.5) 2,400
Net worth (post-rights issue position) = K80,000
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Practice Q2
DC Co is planning to raise additional finance through a 1-for-3 rights issue
of shares. The current share price is K2.80 per share while the new shares
will be offered at a discount of K0.40 per share. Currently, the firm’s share
capital is K1,500,000 with a par value per share of K0.50.
Required:
a) Determine the theoretical ex-rights (TERP) price.
b) Calculate the number of new shares and funds to be raised.
c) Determine the value of DC company post rights issue.
d) Calculate amount receivable from sale of right by an investor with 1.5%
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holding.
Solution (a & b)
Part (a):
3 old shares valued at K2.8 each = 8.40
1 new share valued at K2.4 each = 2.40
4 10.80
TERP = 10.8/4 = K2.7
(part b):
Number of new shares =K1500000/K0.5 = 3m/3 = 1m
Amount to raise = 1m *2.4 16
= K2.4m
Solution (c)
Post-rights issue value
Value of old shares =3m*2.8 = K8.4m
Value of new shares = 1m*2.4 =K2.4m
Total value =K10.8m
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Question(d )
Existing shares =K1,500,000/K0.5 = 3,000,000
Investors shareholding =1.5% *3,000,000 =45,000
Number of rights =45,000/3 = 15,000
Value of a right for new shares = K2.7 -2.4 = K0.30
Amount receivable from sale of rights = 15,000*0.30 = K4,500
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Practice Q3
A business is planning to raise finance through a 2-for-3 rights
issue. The current share price is K5.0 while the new shares will
be given at a 30% discount to the market price.
Required:
a) Determine the ex-rights price.
b) Calculate the value of the right for both old and new shares.
c) Determine the amount to be raised from the rights issue if
the share capital is K1.2million made of 40 ngwee shares.
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d) Calculate the value of the business post-rights issue.
Methods cont.
Bonus issue (scrip issue or capitalization of reserves);
Issuance of additional shares to existing shareholders out of reserves.
Results in reduction in reserves and increase in issued shares.
Scrip dividend:
Issuance of additional shares to existing shareholders as a form of
dividend in lieu of a cash dividend.
Retains the cash that should be paid out as dividend.
Objective to preserve liquidity as well as meet the shareholders need.
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Methods cont.
Share split;
Issuance of additional shares to existing shareholders at no
additional costs or charges.
Increases the number of issued shares but not the funds in the
firm.
The objective is to dilute the share price so as to make the share
price competitive.
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