1. What is a rights issue? Contrast in detail the advantages and disadvantages of a listed company using a rights issue rather than a private placement when raising additional equity capital.

2. Succulent Veggies Ltd had its initial public offer (IPO) of shares on 1^st of July 2020. The company had 20,000,000 shares on issue before the offer. The share offer was underwritten by Compost Investments, with total costs of one percent of the offer value. The share offer consisted of 5,000,000 shares (no shares were sold by the existing shareholders in this offer). The share offer (subscription) price was $2.00 per share. Subscriptions received by the underwriters at the offer close date were for a total of 5,000,000 shares. Market share values were as follows:

• First day close price was $2.10.
• First year anniversary share price was $2.20 (in the corresponding period the market index return was six percent, while the companys relevant industry index provided eight percent return). Note: assume that the systematic risk of the IPO company, the equity market and the industry are one and the same (i.e. you are not required to risk-adjust the returns for this IPO).

Based on the above scenario answer the following questions:

1. From the IPO companys perspective, is the share offer underpriced or overpriced and by how much by the end of the first trading day?
2. What is the amount raised by the offer (after underwriting costs)? How much has the underwriter earned from the IPO?
3. Briefly comment on the listing day and subsequent returns performance of this initial public offer: 1) from the original owners perspective (those investors who held shares before the IPO was initiated, and 2) from the perspective of investors who bought into this IPO at offer subscription price.