ACCA Financial Management (F9) Certification Practice Exam

Which statement accurately describes a rights issue?

1. All shares are sold at market value.

2. New shareholders are brought in to dilute existing shares.

3. Existing shareholders can buy additional shares at a discount.

4. It requires a unanimous vote from shareholders to proceed.

The correct answer is: Existing shareholders can buy additional shares at a discount.

A rights issue is a method used by companies to raise additional capital by offering existing shareholders the opportunity to purchase further shares in the company, typically at a discounted price compared to the current market value. This ensures that current shareholders have the chance to maintain their proportionate ownership in the company and prevent dilution of their shares. By selling shares at a discount, the rights issue incentivizes existing shareholders to invest more capital into the company, often benefiting both the company and the shareholders. It is important to note that this process does not require new shareholders to be brought in; rather, it focuses on the existing base of shareholders. In addition, a rights issue does not necessitate a unanimous vote from shareholders; typically, it may require a simple majority depending on the company's articles of association. Therefore, the notion of requiring a unanimous vote is not relevant to the execution of a rights issue. This understanding highlights why the option regarding existing shareholders being able to buy additional shares at a discount accurately reflects the nature of a rights issue.