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 | 1 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

Stock split corporate action

In this corporate action the number of shares outstanding is increased by splitting the face value. For example, if a company has 100 crore (1 billion) outstanding shares of Rs10 and announced a face split from Rs 10 to Rs2 per share. One share of face value Rs10 will become 5 shares of Rs2 face value. A person holding 1000 shares of the company will have 5000 shares after the stock split. The price also comes down proportionately on Ex-date i.e. in the above example the price will be 1/5th of the price before the split. The reason is Earnings Per Share (EPS) comes down as the Total profit remains same but number of shares are increased.

Companies split the stock when the price is too high for small investors to buy the shares. As the price comes down proportionately the liquidity increases in the counter as the small investors will start trading at the affordable price. Because of this reason the share price will move up after the split (i.e. the price will be little more than 1/5th of the price before the split in the above example). Read more

October 18, 2008 | Filed Under Stocks | 2 Comments

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