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ACCA Applied Skills · Financial Management · Sources of, and raising, business finance

Which of the following is a recognised advantage to a company of raising new equity finance through a rights issue rather than a public offer to new investors?

The recognised advantage is that existing shareholders' proportionate control is preserved if they take up their rights. Shares are offered to current holders pro rata, so ownership percentages stay unchanged, unlike a public offer to new investors, and issue costs are typically lower.

  1. AExisting shareholders' proportionate control is preserved if they take up their rightsCorrect
  2. BIt always raises more money because the issue price must exceed market price
  3. CIssue costs are zero because no prospectus is needed
  4. DNew shareholders are guaranteed to be attracted to the company

Explanation

A rights issue offers shares first to existing shareholders in proportion to their holdings, so those who take up their rights keep the same percentage ownership and control. Rights issues are usually priced at a discount to market price, not above it, and they still incur some issue costs, though lower than a public offer. They are aimed at existing holders, not new investors.

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