On a rights issue, the maximum number of new shares offered is based on what?

On a rights issue, the maximum number of new shares offered is based on what?

• A. Market capitalization
• B. Current shareholding
• C. Company profits
• D. Net assets

Answer: (B)

The main idea here is that a rights issue is handed out to existing shareholders in proportion to what they already own. The maximum number of new shares that can be offered is set by current shareholding, because the rights are allocated pro rata to those holdings. In other words, how many new shares are available depends on how many shares exist before the issue and the rights ratio (for example, one new share for every four you own). Profits, net assets, or the market value of the company don’t determine the size of the rights issue; it’s the existing share base that decides how many new shares can be issued and how they’re allocated.

The main idea here is that a rights issue is handed out to existing shareholders in proportion to what they already own. The maximum number of new shares that can be offered is set by current shareholding, because the rights are allocated pro rata to those holdings. In other words, how many new shares are available depends on how many shares exist before the issue and the rights ratio (for example, one new share for every four you own). Profits, net assets, or the market value of the company don’t determine the size of the rights issue; it’s the existing share base that decides how many new shares can be issued and how they’re allocated.