Equity right offering is the disbursement and the invitation for security holders in a firm to subscribe or buy addition shares in the public traded company (Robert, 2000 p.131). The shares are classified as non-dividends size for size way of floating capital. Exiting shareholders are accorded the opportunity and benefit to acquire new shares of the firm in a prospectus issue. In reality the right issues is a public offering to the corporation shareholder to inject more equity for purpose of expansion and operation.
Equity offering is more appropriate for Public traded firms because they don’t erode the firms leverage options. Also, corporations prefer to use equity issues to debt issue because the instrument does not erode the firms value. The equity issues have attractive terms of reference to debt issue for a corporation. There are numerous advantages of using equity offering to a company such as making the best use of useful life of tax loss carry-forward.
The benefit arises from the fact that in equity issue there is no Sale theory and change of control. The net effect of the preservation is that the company is able to reserve the tax loss carry-forwards. So in practice the equity issue does not have the dilutive effect of other financing. Equity-holders share the rewards and risks associated with the proprietor corporate enterprise. Equity offers are usually offered to employees, family, friends, mutual funds and venture capital (Jefferies, 2013, p.230).
Merits of equity issue
The merits and the demerits derived from equity issue can be divided into two parts. The benefits are divided into the benefits that are derived by the corporation issuing the equity and the investor buying the equity (Morgan, 2013, p.130). The most exceptional feature of the equity issues is that equity-holders have controlling stakes in the affairs of the company. The equity-holders have unlimited concerns in the firm’s assets and profits.
There are five merits a firm can enjoy from equity issue. First, the company is able to utilize the equity for eternity as long as they stay in operation. This implies that the company is not allowed to pay back the capital injected into their business unless the firm is liquidated. Secondly, Equity shares don’t attach any financial burden on the corporation profits. This means that the company can only pay dividends if all other obligations have been settled and profit still exists.
Notably, the credit worthiness of the firm is not affected by equity issue since there are no changes in the assets of the firm (Robert, 2000 p.134). It therefore means that a firm can seek further leverage on the collateral of the firms fixed assets. Fourth, equity issues are considered a risk capital because the firm can deal with the same in the bad period on risk of equity capital. Finally, the firm can pursue a resilient and sensible dividend policy; therefore, they can decide to maintain huge reserves for expansion programs.
The merits to equity-holders comprise the additional income to the Equity-holders because they are the Residual suitor. Secondly the equity-holders have the capacity to participate in the voting and electing competent directors. The director’s primary responsibility is to protect the interest of equity-holders by ensuring that the affairs of the firms are run efficiently. Thirdly, the market value of the stakes fluctuates with annul profits of the firm. The real worth of the firm is tied to the net value of assets of the firm. A gain in the net value of the assets will increase the markets value of the equity stakes. The appreciation in the market value of the equity stakes results to capital appreciation for the equity investors (Epstein et al, 2004, p.460).
The fourth advantage of equity investment is that it is affordable to least income individuals. Equity issued shares are divided into lower denomination such that person of limited resources can purchase the shares. Finally, it is more attractive to speculators because the security fluctuates more rapidly (Beck, 2004, p.500). The speculators can take advantage of the volatility of the stock to make abnormal profits.
Demerits of equity right issue
The first demerit that relates to the operation of the firm is that the firm has to concede control because it dilutes the voting rights of existing shareholders. The control is relinquished because the power is decentralized to the individuals that acquire the equity issued stakes. Additionally, excessive issue of equity stakes will result to overcapitalization. Overcapitalization results in low dividends issued which result in undesirable investor’s mentality.
Moreover, the firm cannot trade on equity after issuing equity. Fourthly, there is lack of capital structure flexibility. The issued equity cannot be paid back when the business is still in operation. It is important to also note that it is very expensive to finance using equity issue because the underwriting cost and selling cost are waged at a higher rate (Bergsten, 2007, p.350). To sum it up, equity stakes are subjected to extreme speculation resulting in frequent price fluctuation which is not the interest of the company.
The demerits concerning the firm include uncertainty and irregularity in the income of the firm. Equity issued stakes receive dividends if there is still more profit to be divided amongst the equity stakeholders. Second, the investor also suffers capital loss during depression and recession because of little dividends and due to deletion of the market value of the stakes. Finally, in the event of liquidation equity-shareholders are severely affected. In the event that the firm is liquidated the equity-shareholders receive their initial investment into the company after all other obligations have been paid. It means that in the event that the financial resources are depleted before they are paid then they will not receive their money back.
G4S is one of the companies that have equity issued in the market. G4S is an international security firm and the largest security provider in Papua Guinea. The company was first incorporate in 1966 and joined the G4S group in December 2007. It is also the only accredited aviation security service provider in PNG. G4S issued an equity offering that amounted to 350 million euros which was equivalent to 10% of existing shares (Boughton, 2009, 45).
G4S issued the rights issue to reduce the 2 billion euro debt heap that the company has been battling to reduce. The company shares rose 5% the day that the company announced the right placement in the market. Previously the shares struggled a lot after a series of bad publicity including the prison tagging contract scandal. The difference between equity issue and private placement equity issue is that equities are floated for the public to subscribe while private placement equity issue targets a small number of private investors.
References List
Beck, M., 2004. Frequently asked Question about right offering: Morrison &Forester, LLP, retrieved press. Pp. 456-698.
Bergsten, C. 2007. Toward a free trade area of the Asia Pacific.Policy Briefs in International Economics 07–2.Washington DC, Peterson Institute for International Economics, February. The financial and economic crisis and global economic governance 323.569-698.
Boughton, J.M. (2009). A New Bretton Woods? Finance and Development 46 (1): 44–46, March.
Epstein G, Grabel I and Jomo KS (2004). Capital management techniques in developing countries: an assessment of experiences from the 1990s and lessons for the future. UNCTAD/G-24 Discussion Paper Series, no.27. New York and Geneva, United Nations Conference on Trade and Development, March. Pp 459-489
Jefferies, T. 2013. How to survive a right issue: As Barclays cash call deadline looms what are the investor’s options. This is money publisher. Pp. 156-259.
Morgan, T. 2013. Raising Capital: What You Don’t Know Could Hurt You. The national Review. Harvard business library. Pp. 129-321.
Robert, R.N. 2000. Cost of loan facilities adjusted; Financial Economics for fast growing economies. Taillight press.Pp. 130-19
