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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 3 of 27
The real wordsTheory

Venture capital and private equity funds

Venture capital fundReceives money from wealthy investors and from pension funds that are willing to lock the money in for 5 to 10 years, and screens business proposals before investing.
Private equity fundPools money from institutional investors such as pension funds and insurance companies, makes heavy use of financial leverage, and follows a buy, improve and exit strategy.

The short contrast: a VC fund buys a stake in something young that may work; a PE fund buys control of something established and fixes it, with borrowed money.

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