Rights Issue – Example

Assume company XYZ has announced rights issue in the ratio of 5:2 (for every 5 shares additional 2 shares are offered). If you hold 100 shares of XYZ then you will be entitled to get 40 (100 * 2/5) new shares of XYZ. The new shares are usually given at deep discount price so that the full issue gets subscribed and the company may raise the required capital. A future date is fixed for this corporate action.

After this corporate action the share price comes down proportionate to the issue ratio, theoretically. Actual value differs from this theoretical value based on the intention of the funds’ raise.

Consider share price of XYZ is Rs 300 and the company is offering new shares at Rs 200 and you hold 100 shares of XYZ.

You can buy 40 shares at Rs 200. The amount required to buy new shares Rs 8000.
Value of the existing shares 300 * 100 = Rs 30,000
Total value of 140 shares = 30,000 + 8000 = Rs 38,000
Theoretical share price ex-rights = 38,000 / 140 = Rs 271.5 Read more

July 25, 2009 | Filed Under Stocks | Leave a Comment

Price of a stock doesn’t depend on the size of the company!

Most of you know this fact but I recently came across some people who were asking me why the stock price of such a big company is less compared to that of smaller companies. The fact is that share price doesn’t depend on the size of the company but on the profitability per share of the company and future growth of the company.

If a big company share price is less; that means the number of equity shares are very high and the profits are not up to the mark. In short, fundamentally EPS (Earnings Per Share) is the deciding factor.

EPS = Total Earnings for the year/ number of equity shares ( Including promoter’s Holding)

In the above example the company’s annual profits may be high but if the equity is also very high then the ratio comes down and hence the price. Companies should maintain profitability according to its equity size. A good example is Ispat Industries. Read more

October 25, 2008 | Filed Under Stocks | Leave a Comment

Bonus issue truths revealed

Companies give bonus shares to the existing share holders by converting their reserves and surplus into shares. In a 2:1 bonus issue a share holder gets 2 free shares for every one share he holds (Don’t get confused. It’s correct). The additional shares come at free of cost but the price gets reduced proportionately.

For example, if you hold 100 shares of company XYZ whose market value is Rs 3000 per share and assume company XYZ has announced 2:1 bonus issue. On ex-date the price of XYZ comes around Rs1000 (It will be slightly greater than Rs 1000 usually. This price is called ex-bonus or post bonus price) and the additional 200 shares or bonus shares get credited to your account after few days. This is because the total number of outstanding shares increased 3 times but the earnings of the company is same. So the new EPS (Earnings Per Share) will be 1/3 rd of previous EPS and share price comes down proportionately.

One can observe that the total equity base of a company doesn’t get much affected with the bonus issue (Market price per share comes down and number of shares goes up keeping the product i.e. Market Capitalization same). In the above example the price may go over Rs 1000 because the liquidity increases because of lower price.

Companies announce bonus shares to Read more

October 12, 2008 | Filed Under Stocks | Leave a Comment

What is Rights issue ?

Rights issue is a method used by companies to raise funds by issuing additional stocks to the existing share holders of the company. Share holders may or may not exercise their right of acquiring new shares issued by the company. Companies fix up a price for rights issue, usually less than the market price to make sure entire issue will be subscribed. The share holders can apply for more number of shares than they are entitled to. If some of the share holders don’t exercise their right the shareholders who have applied for additional shares are allotted the same.

It’s important for a shareholder to know the reason behind the rights issue i.e. whether the company is raising funds to acquire another company or to expand the existing business or to meet the obligations of the existing business.

Usually the share price comes down proportionately. This is because the company’s equity base goes up with the additional shares and hence the EPS (Earnings Per Share, Total Net Profit / No of shares outstanding; As the denominator increases keeping numerator at the same value the ratio comes down) comes down. Considering the same market conditions, to maintain the same P/E ratio before and after the issue, price comes down. Read more