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Sem 5 Prep
← Money & BankingEquity markets, private and public

Formulas for this chapter

Rights per new share

N = S0 / s where s = Amount to be raised / Subscription price

The first step of every rights problem. Get s from the money to be raised and the subscription price, never from the market price.

S0
Number of shares outstanding before the issue
s
Number of new shares issued
N
Rights required to buy one new share; need not be a whole number

After-rights price

Px = (S0 x P0 + s x Ps) / (S0 + s)

The ex-rights or theoretical after-rights price. It is a weighted average of the old market price and the subscription price, weighted by share counts.

P0
Cum-rights market price, before the rights go ex
Ps
Subscription price of the new shares
Px
After-rights (ex-rights) price

Value of one right

Ps + N x R = Px -> R = (Px - Ps) / N Identity: P0 = Px + R

To value a right, and to check any rights calculation. The value of a right always equals the fall in the share price from cum-rights to ex-rights.

R
Value of one right
N
Rights needed per new share

Shareholder wealth under the three options

Exercise: (holding + new shares) x Px - (new shares x Ps) Sell rights: holding x Px + rights held x R Do nothing: holding x Px

To show that a rights issue is wealth-neutral. The first two give the same answer as holding x P0; only the third is lower, by exactly the value of the lapsed rights.

holding
Shares owned before the issue
rights held
One per existing share
Step 2 of 27
The real wordsTheory

Private equity

Private equityA business that is privately held, whose owners cannot sell their shares to the public.

The slide gives two reasons owners want to change that and go public:

  • To finance growth, because retained earnings and bank debt are not enough
  • To cash out, because a founder's wealth is locked inside an unsellable asset

Those two motives pull in different directions, and a good IPO question turns on which one the promoter really has.

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