Here we look at shareholder alternatives.

Do they decide to take up their rights versus selling their rights? And maybe something in between.

Here we've got an example, a two for one rights issue with issue price of one Euro existing share price of two euros.

We've also been given the TURP or theoretical X rights price of one Euro 33, and the value of the rights is 33 cents.

To give away the punchline of this slide, what we're going to see is that it doesn't matter to the shareholder's wealth, whether they take up their rights, sell the rights, or do something in between.

Let's have a look here. We've got a shareholder that has 100 shares, and initially they're going to take up their rights, pre rights issue, the value of their 100 shares shareholding, and we're gonna stay with a hundred shares shareholding throughout. This example is 200 euros, and we're going to see that throughout this, the wealth of that shareholder stays at 200 euros.

Let's look at what happens post rights issue.

Well, initially, the shareholder has to make a subscription payment to the company.

Now it's a two for one rights issue.

They had a hundred shares to start with, so they're going to be given 200 shares each at a price of one Euro.

So 200 times one Euros shows a subscription payment of 200 euros.

What's the value of their shareholding after all this? Well, they had a hundred shares add on. The 200 shares gives them 300 shares in total, but they're now worth the theoretical X Ys price of 1 33.

So the value of the shareholding is now 400 euros.

Fantastic. You might say, my shareholding, whoa, it's gone up in value, but of course they had to spend money on that.

So the value of the shareholding is 400, but they had to make a subscription payment of 200.

So it nets off back to the initial 200.

Again, total wealth equals 200 euros.

Now let's look at what happens when they sell all of their rights.

Well, initially, the value of the a hundred share shareholding, exactly the same, 200 euros.

If they sell all of their rights, there'll be no subscription payments. That's just a dash, but they will receive proceeds from selling the rights.

There are 200 rights to sell, and they're each worth 33 cents.

So the proceeds will be 66 euros and 70 cents or thereabouts.

So what's the value of the initial shareholding? Well, the initial shareholding was just 100 shares, and they're each worth the TURP or theoretical XX price of one Euro 33.

So the value of the shareholding has gone down.

Oh no, it was 200. It's now just 133 Euros.

Point three. However, my shareholder has been compensated. They've received Proceeds from selling the rights.

So if we add the 66.7 and the 133.3, we can see the shareholders' total wealth is 200 exactly the same as before, and exactly the same as if they take up their rights.

Now, let's go for a third example.

They're going to sell 150 rights, which means they're going to take up 50 of them.

Initially, we have a subscription payment.

50 shares are going, or 50 rights are gonna be taken up at a cost of one Euro each.

So 50 euros is paid out by the shareholder, but they also receive proceeds from selling their rights selling the remaining 150 rights.

150 are sold for 33 cents each.

So 50 euros comes in.

Now those proceeds of 50 euros and the subscription payments of 50 euros, those figures are the same. And that's not just a coincidence.

Our shareholder has received 50 in proceeds, and they spent that same 50 on the subscription payment.

This means that this is a cash neutral transaction.

It's very attractive to them because they get to enjoy some of the rights issue, but it hasn't cost them any money from their own bank account.

Receiving in just enough proceeds to then spend on your subscription payment is known as tail swallowing.

What's the final value of their shareholding? So 50 euros came in from the proceeds.

50 euros went out for the payments.

Value of the shareholding is 200, so their total wealth is still 200 Euros.