8. Santos Limited has expanded its exploration program and has decided to fund the expansion through...

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Finance

8. Santos Limited has expanded its exploration program and hasdecided to fund the expansion through the issue of additionalordinary shares to its existing shareholders on a pro-rata basis ofone new share for each 5 shares held. The issue price is $11.75 pershare and the current market price is $11.95. The financialadvisers to the corporation have recommended the use of anunderwriting facility. The board of directors has noted that theunderwriting facility has an outclause if the market price dropsbelow $11.45. Having regard to this information, answer thesequestions. (a) What type of issue is Santos Limited making to itsshareholders?

(b) What is an underwriting facility, and why might Santos use sucha facility?

(c) Why might Santos use an underwriter?

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a What type of issue is Santos Limited making to its shareholders 1 The issue by Santos Limited of additional ordinary shares to existing shareholders at a ratio to the existing shareholding is a prorata rights issue 2 In the above example the shareholder will receive one new share for each five shares currently held The new rights shares See Answer

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