Question

Question 2 a) Distinguish between best effort and firm commitment method of underwriting, highlighting when the underwriter will use each of the methods Commato Ltd went publie last year. Suppose that the underwriters acquired 70 million shares of Commato for $70 and sold them to the public at an offer price of S and other costs and that the shares ended the first day of trading at $89.00. What percent of the mone was absorbed by direct expenses? What are the net proceeds received? What is the cost of underp b) 75. Assume Commato also paid $10 million in legal fees meeting on 25th May 2012, the Board of Directors of Guardian Holdings Limited, a publicly traded shareholders, in the proportion e rights offering was GHe45 and the ex-right Estimate the value of one right, the number of shares currently outstanding and the theoretical price of c) At its company listed on the Ghana Stock Exchange resolved to make a rights issue of one new share for e nineteen ordinary shares then held at a price of GHc40 per share each to existing in which they held shares at the record date of the offer. The company offered to issue 10.000,000 new ordinary shares of the Company at the subscription price to raise money to repay short-term debt, thus reducing its leverage ratio to about 35%. The price of the shares at the time of t date was fixed at August 9, 2012, The firm's tax rate is 30% i. the stock on August 9,2012. i Mr. Gyimah who owns 437 shares is concerned that the rights issue will lead to voting dilution and economie dilution of his investment in the company. Suggest two courses of action to Mr. Gyimah that will address his concerns and show that as long as he acis on your advice, the effets h concerned about will not materialize

Answer 1

a)

Best Efforts:

Best efforts is a contractual term in which an underwriter promises to make their best effort to sell as much of securities offering as possible. Best-effort agreements are used mainly for securities in a less-than-ideal market condition or with higher risk, such as an unseasoned offering.

Firm Commitment:

Firm Commitment is an arrangement whereby and investment bank enters into a written agreement, with the issuer of the securities, to make an outright purchase from the issuer of securities to be offered to the public. The underwriter, as the investment banker, is required to make its profit on the difference between the purchase price and the public offering price.

b)
Given:
Aquired shares		70	Millions
Price / share		$                70.00
Sold to Public per share		$                75.00
Legal Fee and other cost paid		$                10.00	Million
Money raised by Commato		$                5,250	Million
(Shares issued *Price to Public)
Net Proceed
Money recived from public		$                5,250	Million
Less Commission to Underwriter		$                    350	Million
Less Legal and Other Fee		$                      10	Million
Net Proceed		$                4,890
What % of money raised was absorbed by direct cost
		6.86%
Cost of Underpricing		$              350.00	Million

c - i)
New right shares to be issued		10	Million
Ratio		1:19
Value of Right share issued		Ghana currency	40
Market Price of share		Ghana currency	45
Since 10, 000,000 million shares to be issued in ratio of 1:19
Old shares		190	Million
Value of Old shares		8,550	Million GH currency
Value of new share		400	Million GH currency
Total Value of Shares		8,950	Million GH currency
Total No shares (New +Old)		200	million shares
Average cost of shares		44.75
Value of Right   =		Number of new shares/ Total number of all shares x (Market Price—Issue price of new share)
		0.25	GH currency per share
No of Share currently outstanding is		190	Million Shares
Theoretical price of Stock		44.75	GH currency per share

c - ii)

Dilution means reduction in the ownership percentage of a company, or shares of stock, due to issueance of new equity share by the company. But as long as company is offering right issue to exisitng share holder in there exisiting holding ratio, this will not be having any impact.

In the above case Gyimah hold 437 share in the company and as per ratio he is entiltled to apply for 437/19= new 23 share to company through right @ GHc 40/ per share, if he applies then there would not be any impact in ownership holding.

Also if he does not want to apply for 23 shares, he can sell in open market its right which will be 0.25 GH per share and can get 109.25 GH currency.