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Q12 2021

A

Alex Bailey

Made first post
Hi,

This is more of a general question here, but can marks be given outside the mark scheme points?

Taking Q12 2012, Explain the factors determining the share price after the rights issue ?

My answer: Dilution of shares, interest rates (macro environment), shareholder base (long term holders or short term traders), current gearing ratio and how the information is delivered to the public -> I think these can all be argued to how much the price will be influenced by a rights issue.

But the dilution of shares is the only one in the MS.

It seems to me that these points are all relevant to the question. However, I'm unsure if they would score marks. Could you clarify this for me?

Thanks
 
Hi Alex,

Regarding a general answer as to whether marks can be awarded for points made outside the mark scheme, please see my comments within the 'Working Required for MCQs' post below yours in this CB1 forum.

In terms of September 2021 Q12, the examiners want you to tailor your answer to the scenario described in the question instead of just quoting bookwork factors that can dictate share prices (e.g. the macro-environment). In particular, the examiners want to see a discussion of why the share price might fall *below* that of the theoretical ex-rights price.

You've touched on this with noting that how the information is delivered to the public could influence the shareholders' perception of the rights issue. The money raised in the rights issue is going to be used to fund a project that the directors believe has a net present value, but if the shareholders disagree then the share price may fall below the theoretical value. Similarly, your idea of talking about the gearing ratio could be expanded to get to the same concern that there may be too much debt to be serviced (due to the shareholders believing the project will have a lower NPV than the directors believe).
 
Thank you very much.

Sorry, yes, I should have been clearer. The argument would be that high interest rates discourage borrowing. Therefore, there is less leverage in financial markets, and so there is less demand for the shares, and the price decreases.

Or with the shareholders, if they are short-term active market participants, they are much more likely to sell shares upon this news than a fund that holds over multiple years.

Subsequent points will be presented in a similar manner, providing detailed explanations for each scenario where the share price might be below the ex-rights price.

thanks :)
 
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