Question

"Although a rights issue allows shareholders to purchase shares below market value, it may not increase shareholder value' for an asset, Explain this statement and why the value of a right is described as being theoretical.

Answer 1

The given statement is true.

Although a rights issue allows shareholders to purchase shares below market value, it may not increase shareholder value' for an asset.

When a componay wants to raise funds through equity and it offers the right to subscribe to additional shares to the existing shareholders at a price below the market value, those shares are known as right shares.

Though Right shares are an advantage for the existing shareholders, It does not decrease shareholders value for an asset. Since, increase in assets post right issue will be equal to the amount of money obtained through right shares and hence, it will not increase the shareholder's value in the assets of the company.