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ACCA Strategic Professional · Advanced Financial Management · Financing acquisitions and mergers

A bidder compares funding a cash acquisition by a rights issue with funding by debt. Which statement is correct?

A rights issue offers new shares to existing shareholders in proportion to their holdings, so those who take up their rights keep their ownership percentage. Debt funding raises gearing but does not dilute voting control, and interest normally attracts tax relief.

  1. AA rights issue increases financial gearing compared with debt funding of the same amount
  2. BA rights issue gives existing shareholders pre-emption rights, protecting their proportionate ownership if taken upCorrect
  3. CDebt funding dilutes existing shareholders' voting control
  4. DInterest on debt is an appropriation of profit and gives no tax relief

Explanation

A rights issue offers new shares to existing holders pro rata, so those who take up the rights keep their proportionate ownership. Debt funding raises gearing and does not dilute control, and interest is generally tax deductible.

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