ABSTRACT
A supermarket has issued 50 million shares. The market price is £2.30 each. The company is therefore valued at £115 million. It wishes to raise an extra £10 million by a rights issue. It therefore creates an extra 5 million shares which are offered to existing shareholders, pro rata to their existing holding, at £2 each. The rights issue is said to be a ‘one for ten’ issue because shareholders are offered one additional share for each ten shares they already own. Theoretically, this dilutes the value of each share. The company now has 55 million shares and its value is £125 million (that is, £115 million plus the extra £10 million realised by the rights issue). The value of each share is, therefore, £125 million divided by 55 million: approximately £2.27. The reason this is theoretical is because the market sets the price of the shares and, with a thriving company, the share price may remain the same or even increase after the issue. On the other hand, if the rights issue is seen by the market as a desperate move, it may be that the share price will fall.
