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Difficulty: HardCapital Market: Institutions and Instruments

A publicly listed corporation requires long-term funds to finance a 10-year infrastructure expansion project and decides to issue new shares exclusively to its existing shareholders in proportion to their current equity holdings. This financial transaction is executed in the primary capital market as a

  1. rights issue managed by an issuing house.Answer
  2. B
    commercial paper flotation managed by a merchant bank.
  3. C
    treasury bill allotment managed by a stockbroking firm.
  4. D
    bankers' acceptance placement managed by a discount house.

Answer

A rights issue managed by an issuing house.
When a public limited company raises long-term funds by granting existing shareholders the pre-emptive right to purchase additional new shares in proportion to their holdings, it conducts a rights issue. Issuing houses are the specialized capital market institutions that structure, underwrite, and manage such primary market securities offerings.

Step-by-Step Solution

1
Analyze the financial objective and time horizon.
The corporate expansion requires long-term capital, placing the transaction in the capital market rather than the money market.
Capital markets deal with long-term securities (maturity > 1 year), whereas money markets deal with short-term instruments.
2
Identify the specific equity issuance method described.
Offering new shares specifically to current shareholders in proportion to their ownership is known as a rights issue.
Rights issues preserve relative ownership percentages and raise fresh equity capital in the primary capital market.
3
Determine the appropriate institutional intermediary.
New capital market securities are underwritten and brought to the primary market by issuing houses.
Issuing houses specialize in structuring and floating new securities, whereas stockbrokers mainly trade existing securities on the secondary market.

Key Concept

Primary Capital Market Instruments and Intermediaries
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Topics

Capital Market: Institutions and Instruments

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