Question

A company needs to raise capital and has decided to offer shares to both its existing shareholders and the general public.

1. Identify and explain the methods the company has exercised to issue shares in the given scenario.
2. State one advantage of each of the methods identified in Part (I).

Answer 1

1. The methods of issue of shares used by the company are:
   • Public issue/going public: Public issue is the most popular method of raising capital these days by the entrepreneurs. This involves raising of funds directly from the public through the issue of a prospectus. An enterprise organizing itself as a public limited company can raise the required funds commonly by preparing a prospectus.
   • Rights issue: A Rights issue is a method of raising additional finance from existing shareholders by offering securities to them on a pro rata basis, i.e., giving them a right to a certain number of shares in proportion to the shares they are holding.
2. • Advantage of going public: The primary advantage an entrepreneur stands to gain by going public is access to capital.
   • Advantage of rights issue: This method of issuing securities is considered to be inexpensive, as it does not require any brokers, agents, underwriters, prospectus or enlistment, etc.