Due to funding challenges that are currently prevailing, your organisation has decided to raise additional long...

Due to funding challenges that are currently prevailing, your organisation has decided to raise additional long term capital through issuance of additional ordinary shares since it still has the capacity. However the board of directors is in a dilemma on which method to use when selling these shares between private placement and renounceable rights issue. Make a presentation on how the two methods work, paying particular attention on their pros and cons to the entity. (35)

CORPORATE FINANCE

Expert Solution

When the board of director is deciding upon whether to issue the shares through right issue which could be renounced or private placement method,it should be decided after taking into perspective different things-

A. Renounceable rights issue-

When the company wants to issue shares to its existing shareholders at a discount to the current market price of the company that is known as right issue.this right issue could either be subscribed by the shareholders or these rights could be renounced by the shareholders in the favour of others.

Advantages of rights issues are as follows-

1.no new share holders are added and it still the existing shareholders that control the entire company.

2. As the number of shareholders in company remains the same the stake of shareholders also remains the same.

Disadvantages of right issue is that as the number of shares have increased significantly price to earning ratio of the shares of the company is going to go down.

B. Private placement method-when a company decides to issue shares to a selected group of investor rather than showing the company shares to a large group of investor it is known as private placement of shares.

Advantages of private placement are as follows-

1. It is a quicker method of raising capital for the company and it is not a complex process.

2. This can be opted to reduce the time and the cost of the company.

Disadvantage of private placement is that it is issued to a limited number of potential investor and a smaller market,so the scope is limited.

The director can make his decision between private placement and preferential rights issue based upon the pros and cons of both methods.

jeff jeffy answered 2 years ago

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