Rights and Bonus Issues of Shares
Rights Issues
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A rights issue offers your existing shareholders
the right to buy further shares in your business, usually at a discount to the
market price (how much they sell for currently). This is a cheaper way to do
this over a full public offering (i.e. to everyone). We know that they are already shareholders and
may be interested in buying more. This is a way of raising finance allowing it
to use the funds to purchase non-current assets, repay debts etc.
•
Shares may be sold at a premium to the market
price – the difference goes in the share premium a/c
•
Shares are usually offered on a x to y basis (known
as pro-rata) – e.g. 1 for 2 basis. If so multiply the current issued value of
the shares by ½ to find out how many new shares (in £) is to be added. Should the shares be sold at a premium then take
the nominal price from the issued price and multiply by the number of shares
sold.
•
Exam Tip - Watch out for shares being 50p rather
than £1 – This means that twice as many shares were sold!!!
Bonus Issue
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This is used as a way of keeping shareholders happy. If a firm is unable to offer dividends (e.g.
due to insufficient funds or wishes to retain the money) then it may give
shares for free on an x to y basis. A bonus issue does not raise finance.
•
If shares are given away on a 1 for 3 basis
multiply the issued share capital (in £) by 1/3 to find out how many shares you
have given away.
•
However since the value of the business (i.e. total
capital) does not change another capital must go down – take it from Capital
Reserves (such as Share Premium or Revaluation reserve) and then, if there is still
not enough the Revenue Reserves.
Bonus issues can also be used to
reduce the share price (a share split) to make shares appear more attractive to
potential shareholders. For example a 1
for 9 bonus issue will recapitalise reserves making £50 shares fall to
approximately £5 whilst reducing some other reserves.
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