SummarylRights issue =issue to existing shareholders at a discount on the current mar-
ket value. Shares offered pro rata to existing holdings.
lIssue costs about 6 per cent of funds raised, but there are economies of scale.
lIssue price is not a big problem.
lTend to be successful.
lControl stays in the same hands if existing shareholders take up their
entitlement.
lRights can be sold by a shareholder who does not want to take them up.
lRights issues seem to be losing their popularity in favour of placings.
lShares easy to liquidate if listed on a stock exchange; otherwise could be very
difficult.
Preference shares
lShares that have a right to the first part of any dividend paid, up to a max-
imum level.
lRelatively little used in recent years.
lRelatively low risk for the shareholders, some risk to the ordinary share-
holders since preference shareholders are usually entitled to any backlog
of dividends as well as that for the current year before an ordinary share
dividend can be paid.
lRelatively low cost to the business and low returns to the preference
shareholder.
lRatios used by preference investors are dividend yield and dividend cover.
lTypically no legal or contractual obligation on the business to pay dividends,
but sometimes there is an enforceable one to redeem the shares.
lDividends are not tax deductible to the business, but are taxable in the hands
of shareholders.
lIssue methods and costs similar to those of equities.
lShares easy to liquidate if listed on a stock exchange; otherwise could be very
difficult.
Loan notes and debentures
lLong-term borrowings, with contractual interest payments and typically
redemption payments as well, though some loans are perpetual.
lTypically an important source of finance.
lUsually very low risk for the lenders, high risk for the business; low levels of
return expected by investors, cheap for the business.
lInterest is tax deductible to the business (makes them seem even cheaper), and
taxable in the hands of lenders.
lIssued to the public through advertising or investment intermediaries, like
stockbrokers, costing up to about 2.5 per cent of the funds raised.
lThe existence of loan finance can severely restrict a business’s freedom of action. ‘