Thursday, January 8, 2009

Capital Land might issue rights

In general rights have a negative impact on the share price of a company as compared to that of a bonus issue.

Hence most people will be expecting the share price to drop when the company issues rights, which it did, on the day of the rumor. Capital Land closed 8.2% down to $3.12 on possible news of the rights issue.

Firstly, let me explain roughly how bonuses work. They are similar to stock splits. I.e if I hold 10 lots now, and the company gives me another 10 lots, I would have a total of 20 lots ( where each lot is half of the initial value,hence no change in total worth). Which is essentially similar to having 10 lots spiting into 2, to give you 20 lots ( where each lot is half of the initial value).
It is usually done because the company believes that it will do well in the following months ahead. So even though the stock price has halved in the example I have given above, with profits from the company, the stock price will still rise.



However for rights, you would have to subscribe to it by paying a certain amount of money. This is generally a means for the company to raise funds, but it is usually not welcomed, as it is diluting the value of the stocks that current shareholders are holding on to. An analogy would be, the profits are like a pie of a company. With more rights issue, there will be more people and hence more people to share the pie. Without an increase in profits of the company ( pie size) each existing person will eat lesser.

On a side note, companies that are doing well and require funds usually turn to taking up debts by issuing corporate bonds or bank borrowing. This is because they will get the necessary funding without diluting the shareholders holdings and would only need to pay the minimal interest from the debt.

8 comments:

Mike Dirnt said...

hi,

just to let you know. there is a difference between in stock split and bonuses. the former will not change any valuation from your side and company's point of view. the latter has an effect on the valuation of the company and your holdings.

in other words, your average buy price is lower and the company valuation is diluted whenever there is bonuses

ntuchartist said...

Hmm, would you care to explain how the valuation might vary due to the bonus?
I read this relationship of bonus and rights from a book which describes it as very similar to each other, but did not really give the key difference the two.

Thanks in advance!

Mike Dirnt said...
This comment has been removed by the author.
Mike Dirnt said...

yes bonus and rights are similar. they affect valuations

i was saying stock split. it doesnt affect anything

you hold 1000 shares at $1 then if
consolidation of 2 to 1 means your 1000 shares become 500 but share price will become $2, so no effect at your side

assume earnings=$0.1M and outstanding shares=1M PE=10, then after split outstanding shares=500.But earnings remain the same so still PE=10.No change in valuation

in conclusion, what im trying to say is stock split and bonuses are not the same.

ntuchartist said...

Yup i agree that they are not the same.

However in the case a stock split of 1 stock into 2. Is it the same as giving a share bonus of 1 share for every share you own?

Anonymous said...

Stock split do not need to spend any money on the additional shares.
Stock split does not dilute the holdings, just that your earning per share will have to be adjusted accordingly. It will not change any valuation of the company.

Rights you have to pay money for the subscription.
Rights dilute the holdings as it included additional shares. It will change ur valuation of the company

ntuchartist said...

Yup i agree with what 'Anonymous' said, but he was comparing stock splits with rights.

What about stock splits and bonus ?

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