For Cracker PLC it does not matter which option to use in right issue with deep discount or only modest discount. The effect in both cases will be equity finance of £20m. However, Cracker PLC should take into attention that right issue with deep discount, may be accompanied by short-term probability that market price will fall below the right offer price. In this situation, we can say with confidence that the offer will be taken up, hence, underwriting services can be redundant and Cracker PLC can make savings on underwriting fees. For example, underwriting fees now risen to around of 3%, thus potential savings could be significant. From shareholders point of view, whatever the price of the discount is, there is no worth or better off. iii) …show more content…
In placing new shares of listed companies are sold to small group of investors. The disadvantages for Cracker PLC is that this method will allow a placing for small proportion of the company’s capital, usually 5-7,5%. Hence, companies can ask to go beyond this limit if appropriate justification will be presented, but this is rare case. Advantages of this method is that prospect is not required, thus savings is obvious. Another advantage is that funds can be raised quickly. Under clawback, existing shareholders have the right to reclaim the placing shares. They can buy them at the price offered to the external investors. With clawback, the issue becomes an ‘open offer’. Under open offer, the disadvantages of placing, described above, can slightly be overcome, and company can rise up to 18% increase in share capital. Secondly, vendor placing. Suitable method when company wants to pay for an asset or entire company for the consideration in the form of shares, but buyer does not want to have shares. In this case, shares sold to institutional investor for cash. The disadvantages is that there is a restriction exists (usually no more than 10% of market capitalization), this is limiting the funds, which could be raised. Another restriction is that price discount could not be more than 5, 7.5 or 10% to the current share