What is a rights issue? Distinguish between a renounceable and a non-renounceable rights issue. How would a company account for such issues?
A rights issue is an issue of new shares to existing shareholders whereby they are given the right to purchase additional shares in proportion to their current shareholdings. Usually the issue price is set below the current market price of the company’s shares.
A renounceable rights issue allows the shareholder to take up the rights issue, let it lapse or sell their rights on the stock market. A non renounceable rights issue only allows the shareholder to either take up the rights by subscribing for more shares, or reject the rights, which mean that they lapse. The shareholders cannot sell the rights.
Detail the characteristics of redeemable preference shares recognised as liabilities rather than equity.
Redeemable preference shares recognised as liabilities rather than equity normally would be redeemable in cash on a specified date or at the option of the holder, be cumulative in regard to the payment of dividends, non‐participating in further dividends and have priority rights to return of capital over ordinary shares.
A company under normal circumstances must maintain its share capital intact. Explain how this is achieved on the redemption of redeemable preference shares. If redeemable preference shares are considered to be equity, then under the Corporations Law they may be redeemed:
* Out of a fresh issue of shares
* Out of profits
Under either the total share capital remains the same:
If the redeemable preference shares are redeemed out of a fresh issue of shares, a new issue of shares replaces those shares and hence the total share capital remains the same. If the redeemable preference shares are redeemed out of profits, the ASIC interpretation of the legislation is that on redemption the Retained Earnings must be reduced and the value of ordinary shares increased by the issue price of the...
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