Net present value and Rights issue: Difference between pages

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imported>Doug Williamson
m (Spacing, formatting bold text numbering 1 and 2, adding "Example" subheading, other formatting clarifications.)
 
imported>Doug Williamson
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(NPV).  
A process of issuing new equity shares where they are offered first to existing shareholders in proportion to their existing shareholding.  


'''1.'''


The total present value of all of the cash flows of a proposal - both positive and negative.  
Existing shareholders have, under law in the UK, pre-emption rights.


For example, the expected future cash inflows from an investment project LESS the initial capital investment outflow at Time 0.
This means that they generally have first refusal on the purchase of any new equity shares.




'''''Example'''''
== See also ==
 
* [[An introduction to debt securities]]
For example, a project requires an investment today of $100m, with $120m being receivable one year from now.
* [[Bonus issue]]
 
* [[Dividend irrelevancy theory]]
 
* [[Headroom]]
The cost of capital (r) is 10% per annum.
* [[Initial public offering]]
* [[Nil paid]]
* [[Open offer]]
* [[Option premium]]
*[[Placing]]
* [[Pre-emption rights]]
* [[Theoretical ex-rights price]]
* [[Trombone]]


The NPV of the project is calculated as follows:
[[Category:Accounting,_tax_and_regulation]]
 
[[Category:The_business_context]]
 
[[Category:Corporate_finance]]
PV of Time 0 outflow $100m
[[Category:Investment]]
 
[[Category:Long_term_funding]]
= $(100m)
[[Category:Financial_products_and_markets]]
 
PV of Time 1 inflow $120m = $120m x 1.1<sup>-1</sup>
 
= $109.09m
 
NPV = -$100m +$109.09m
 
= '''+$9.09m'''
 
 
'''2.'''
 
In simple ''Net Present Value analysis'' the decision rule would be that all positive NPV opportunities should be accepted, and all negative NPV opportunities should be rejected. 
 
So the project in the example above would be accepted because its NPV is positive, namely +$9.09m.
 
 
However this assumes the unlimited availability of further capital with no increase in the cost of capital.
 
A more refined decision rule is that all negative NPV opportunities should still be rejected while all positive NPV opportunities remain eligible for further consideration (rather than automatically being accepted).
 
 
== See also ==
* [[Capital rationing]]
* [[Discounted cash flow]]
* [[Internal rate of return]]
* [[Investment appraisal]]
* [[Present value]]
* [[Residual theory]]

Revision as of 08:24, 1 June 2023

A process of issuing new equity shares where they are offered first to existing shareholders in proportion to their existing shareholding.


Existing shareholders have, under law in the UK, pre-emption rights.

This means that they generally have first refusal on the purchase of any new equity shares.


See also

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