Corporate Finance
What is tested
Corporate finance examines how companies raise and deploy capital: equity versus debt, rights issues, placements, buy-backs, capital reduction and investment appraisal. Expect calculations and approval-route questions.
Core rules
- Equity finance includes rights issues, bonus issues, private placements and preferential allotments; debt finance includes term loans, bonds and sukuk.
- Pre-emptive rights under s 76 give existing shareholders first refusal on new shares; a private company may exclude this in its constitution, and shareholders may waive it.
- Capital reduction may use the solvency-statement route (ss 115-116) or the court route. A buy-back requires a solvency statement and is subject to treasury-share limits.
- A prospectus is required for offers to the public under the Capital Markets and Services Act 2007 unless an exemption applies.
- Appraisal: NPV discounts incremental cash flows at the cost of capital; IRR is the discount rate giving zero NPV; WACC blends after-tax cost of debt and cost of equity by market-value weights.
Worked example
A company makes a 1-for-4 rights issue at RM1.20 when the market price is RM1.50. Theoretical ex-rights price = (4 x RM1.50 + 1 x RM1.20) / 5 = RM1.44. The value of the right = RM1.50 - RM1.44 = RM0.06 per existing share, or RM0.24 per new share (RM1.44 - RM1.20). Compare this with the subscription price to advise the shareholder.
Traps
Ignoring pre-emptive rights; using book values instead of market weights in WACC; forgetting the tax shield on debt; assuming a capital reduction always needs court approval; confusing a bonus issue (no cash) with a rights issue.