Question

The directors of Siedu Ltd. have recently announced a record increase in payment for the half-year ended 30th September 2005.

On announcement date, the company’s equity share price was ¢3000, its highest level for many months, giving it an equity market capitalization of approximately ¢480 billion.

On the same day as the profits announcement, the directors declared their intention of raising funds via a rights issue in order to finance a major expansion in Siedu Ltd’s overseas operations. Their aim is to raise total funds of ¢100 billion (after incurring ¢3.5 billion issue costs) by offering shareholders the right to one share of ¢2600 for every four shares currently held.

Your are required to:

i) Calculate the market value of the rights to each new shares issued by Siedu Ltd.


ii) Describe the various types of cost to be incurred by Siedu Ltd. in making its rights issue.

Answer 1

I) Value of right = (Number of right shares/total holdings (old +new))*(Market value-issue price)

Calculation of number of right shares = (Market cap/Price of one share) * right proportion

= (480 Billion / 3000)*1/4 = 0.04 Billion

Total holdings = 0.16 Billion +0.04 Billion = 0.20 Billion

Value of right = (0.04/0.20)*(3000-2600) = c80

II) Types of costs incurred in making right issue

• Professional Fees: includes fees for attorneys, as well as certified public accountants / Chartered accountants.
• Clerical Cost: includes both administrative and clerical costs associated with preparing regulatory filings as well as registrations.
• Filings Cost: expenses and fees associated with filing the issue with the Securities and Exchange Commission / SEBI.

P.S - There are few types of costs that are incurred during an issue but are avoidable during right issue like underwriting commission, marketing costs etc.