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Finance Project

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by

Kyle Li

on 17 December 2012

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Transcript of Finance Project

HKU SPACE Community College
Associate Degree Financial Management Project Class Code :
88-278-01-08

Members:
Li Kai Yau Kyle (10550056)
Tam Hoi Ching Xanis (10550024)
Ching Hou Jing (10549884)
Cheng Ka Ki Kiki (10557511)
Yip Yee Ching Emily (10555853)
Yu Wing Keung Jacky (10556197)
Liu Chung Man Jonathan (10555997) Title: Rights offering Did you go shopping in Esprit? Example: Esprit Holdings Limited One of the ways to raise capital

The company issues additional shares to existing shareholders in proportional to their existing holdings (ratio basis) at subscription price (a price lower than the market price) within a fixed subscription period.

The pre-emption rights
Law gives authorization to existing shareholders to accept or refuse new shares What is a rights offering? Market price of Esprit is HK$12.44 per Share on the last trading day.
Esprit sets the Subscription Price at HK$8.00 per Rights Share. Step 1 - Determine the total capital the company want to raise Step 4: Calculate the basis of rights offering Total no. of rights
= Total capital that Esprit wants to raise / subscription price
= HK$5,168.7 million / HK$8.00
= 646 million of rights shares Important dates Introduction Shareholders’ 4 options Exercise the rights Exercise the rights To exercise ALL new shares.
Reasons:
Sufficient money
Beliefs of worth investing
Effects:
Percentage of share holdings and voting power remain the same retained Sell ALL the rights.
Reason:
insufficient money
beliefs of not worth investing
Effects:
Dilution of control Holding: 100 shares at market price $12.44
Offering: 50 shares at subscription price $8

Theoretic Ex-rights price =($12.44 x 100 + $8 x 50)/(100+50) = $10.96
Value of 1 right =Ex-rights price -Subscription price
=$10.96 - $8
= $2.96

Rights sold
= total number of rights offered x value of one right
= 50 x $2.96
= $148 Sell the rights Selling a portion of the rights and buy the rest

Reasons:
without putting any extra cash
beliefs of not worth investing

Effects:
Dilution of control Tail-swallowing Holding: 100 shares at market price $12.44
Offering: 50 shares at subscription price $8

Value of 1 right = $2.96

For instance,
Sell 37 offered shares and the total value
= $2.96 x 37
= $109.57
Buy the remaining 13 shares at subscription price
= 13 x $8
=104 Esprit proposes to raise approximately HK$5,168.7 million. Step 2 - Set a subscription price which is at a discount Do nothing Let the rights to expire.

Reason:
Insufficient money
Beliefs of not worth investing

Effects
Dilution of control
Suffer the loss
New shares will be sold in the market Step 3: Calculate the total no. of rights has to be offered Total no. of shares Esprit issued in the stock market = 1,292 million rights shares

Basis of rights offering
Total no. of shares issued : Total no. of rights
1292 million : 646 million = 2:1

The basis of rights offering is 2 existing shares for 1 rights. Avoid the dilution of interest Advantages Risk of drop in stock price

Amount of investment increased Disadvantages What does the company do for Rights offering? Announcement Date (22nd Oct)
Company announces the decision of right offering

Last Day (26th oct)
To purchase Esprit ordinary shares with rights entitlement

Ex-right Date (27th Oct)
No longer have right entitlement for shares

Record Date (also called holder-of-record date) (2nd Nov)
Existing shareholders are designated as the recipients of share rights

Rights are deposited into shareholder's account

Subscription Period (7th Nov - 14th Nov)
A period that rights can be traded in the stock market

New ordinary shares are deposited into shareholder's account Sell the rights Tail-swallowing Do nothing Example: Esprit Example: Esprit Holding: 100 shares at market price $12.44
Offering: 50 shares at subscription price $8

Theoretic ex-rights price
= The total values of share holdings / The total no. of shares
= ($12.44 x 100 + $8 x 50) / (100 + 50)
= $10.96

Take up ALL rights:
Total cost of 150 shares
= $1244+ $400 = 1644
Average cost per share
= $1644 / 150
= $10.96
= Ex-rights price Example: Esprit Shareholders' Perspective Increase capital

Let the company to carry out fund acquisitions and growth strategies

Right offering does not require shareholders' approval, thus is a quicker way to finance

Marketing expenses saved
Offering made to existing shareholders Negative impact on stock price Company's Perspective Total no of . share held = 1000
No. of existing shares = 1,292 million shares
Original percentage of shares held by that shareholder
1000 / 1,292 million = 7.74 x 10 % Example: Esprit -7 New amount of total shares after rights offering
= 1,292 million + 646million = 1,938 million shares
New percentage of shares held by the same shareholder
= 1000 / 1938million = 5.16 x 10 % -7 Dilution happened! Advantages Disadvantages THE END THE END
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