Demerits of raising equity via the rights issue

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Reference no: EM133021194

Cow ltd has issued 3,000,000 ordinary shares with a nominal price of Ugx 1 each. The shares of Cow ltd are currently selling at Ugx 400 per share. The company plans a rights issue of 1 for 3 at a price of 320 per share. Goat, who is a shareholder with 900 shares in Cow ltd thinks he will suffer a loss in his personal wealth because the new shares are being offered at a price lower than the market value hence the actual market value of a share after the rights issue will be equal to the theoretical ex-rights price (TERP).

Required

a) Advise Cow ltd on the merits and demerits of raising equity via the rights issue.

b) Evaluate the effect on goat's wealth if he: sells all his rights or does nothing

c) Describe some of the costs that will be incurred by Cow ltd to make the above rights issues

Reference no: EM133021194

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