Specific Learning Outcome: Recognize the functions of capital markets and roles of financial

intermediaries.
 There may be a direct transfer of savings from the investor to the borrower.
 There may be an indirect transfer that used the services provided by an investment
banker.
 There may be indirect transfer that uses the services of a financial intermediary.
Banks, private pension funds and life insurance companies are prominent examples of
the latter case.

Financial markets facilitate transactions of all types of financial claims. It also facilitates the
flows of funds among investors, firms, and governments. They perform the function of
allocating savings in the economy to the ultimate users to carry out profitable investments.
Without these markets, the total wealth of an economy would be less due to the lower rate of
capital formation. Without these markets, the total wealth of an economy would be less due
to the lower rate of capital formation. Without financial markets, individuals and firms who
have good ventures will need to accumulate enough savings by themselves over a long period
of time in order to invest.
In the good economic condition (market is bullish)
FMI performed good intermediary functions which will ensure the funds are transferred
wisely and efficiently to help the business firms/corporations (demander of the funds) to
grow. The business firms are able to raise both the debt and equity financing in the good
economic condition which the firms produce more products, services in economy (increase
the firm’s operating, production) which result in increase in employment and makes Export >
Import thus GDP of the country increase.

However, in the recession year (market is bearish)

The cash is power, the funds/source of financing are very much limited for the business
firms/corporations )demander of the funds) to grow (the loans from banks are restricted, the
investors tend to be more risk averse by not investing in stocks). The business firms are
getting hard times to raise their financing in the recession period which causes the firms
produce lesser products, services in economy which result in bankruptcies rise for business
firms, unemployment increase and lead to no export and import and thus great reduction in
the country’s GDP.
Specific Learning Outcomes: Identify various sources and methods that listed firms (or
corporations) can raise capital.
- Initially, the corporation raises funds in the financial markets by selling securities.
- The corporation then invests this cash in return generating assets.
- The cash flow from those assets is either reinvested in the corporation, given back to
the investors in the form of dividends or interest payments, or used to repurchase
stock which should causes the stock price to rise, or given to the government in the
form of taxes.

Several positive benefits are associated with private placements. The first is speed. Funds can
be obtained quickly, primarily due to the absence of a required registration with the Securities
and Exchange Commission (SEC).
Second, flotation costs are lower as compared to public offerings of the same dollar size.
Third, greater financing flexibility is associated with the private placement. All of the funds,
for example, need not be borrowed at once. They can be taken down over a period of time.
Elements of the debt contract can also be renegotiated during the life of the loan.

Potential drawbacks of going public include:

- Dilution of ownership and control for existing shareholders due to wider ownership of
the company shares
- Initial public offering (IPO) can be costly. Flotation costs will be borne by the
company (flotation costs include underwriting fees, printing and distribution costs of
prospectus, advertising fees, consultancy and legal advice fees, trustee fees, stock
exchange listing fees)
- More reporting requirements will disclose more information to competitors who are
not listed (private limited companies)
- Enormous time and efforts to comply with more stringent stock exchange and
Securities Commissions’ regulations
- Profits and performance of listed company is more in public eyes. Therefore, a listed
company cannot afford to show poor results without attracting considerable criticism.
- A listed company’s share price may become vulnerable to campaign to drive it down
by selling its shares (bear raids). Thus, more likely to become target of hostile
takeover
When stock prices reflect instantaneously in an unbiased manner all relevant information
about a security, it is said to be price efficient. If the market is in strong-form efficiency, all
public and private information has been included in the market prices, disallowing any
abnormal profits to be made.

1. An immediate and direct implication of an efficient market is that no group of

investors should be able to consistently beat the market using a common investment
strategy.

2. They do not need to worry the effect of financial results in published accounts on
share prices because investors will make allowance for low profits or dividends in
current year if higher profits or dividends are expected in the future.

3. Finance managers will not be able to mislead investors by window dressing the
accounts and put an optimistic spin on the figures.

4. Finance managers do not need to identify when to issue new shares because share
prices in the market always reflect the true worth (fair value) of the company.

5. When a company wishes to expand by takeover, directors do not need to waste their
time to identify takeover target companies whose shares are undervalued, since the
market will fairly value all companies’ shares.
Equity Crowdfunding (ECF) Peer-to-Peer (P2P)
Offer an opportunity for the public, specifically high-net- Permit individuals invest money in small companies in
worth investors to invest in small emerging companies or the form of debt, through licensed online platforms.
tech start-ups, involving the sale of equity in small
companies. While P2P lenders in Malaysia, who can invest from as
low as RM 100, get a return from money they have lent to
SMEs. ECF investors on the contrary are investing for the
long term in companies that are focused on growth. The
profit ECF investors make is crystallized at an exit during
an initial public offering or a sale of the company to new
investors. While the risk may be higher, as the company
takes time to grow, the returns from ECF can be much
higher than P2P lenders.

Challenges
1. Lot of works done on tilling the ground for ECF 1. Borrowing funds from P2P platforms means
awareness, reception, and mechanism of a relatively disclosing information to a pool of unknown outsiders.
new funding avenue. This represents a risk where the company information
2. Collaboration efforts needed within the start-up might be accessible by competitors.
ecosystem that includes various institutions: 2. The returns will depend solely on the risk profile of
 Malaysia Digital Economy Corporation (MDEC) the SMEs. Thus, P2P financing platforms will have to
 Cradle Fund Sdn Bhd (Cradle) primarily refer to data provides by
 Malaysia Business Angel (MBAN) - Bank Negara Malaysia’s Central Credit
 QEERAD Reference Information System (CCRIS)
 MSC Management Services Sdn Bhd (MSCMC) - Credit Bureau Malaysia Sdn Bhd
 SME Corp - CTOS Data Systems Sdn Bhd
 Malaysian Global Innovation and Creativity 3. The loans provide by P2P platforms have different
Centre (MaGIC) tenures, ranging from 1 to 36 months. Investors with
3. The biggest challenge for ECF operators has been to less holding power and who need higher liquidity
educate both issuers and investors about investments should invest in short-term loans.
into early-stage companies
4. Much of the groundwork has been on the methodology
and access of raising funds through new avenue
5. Concerns for the investors would be on exit
mechanisms, interest returns and dividends
Specific Learning Outcome: Identify various sources and methods that listed firms (or
corporations) can raise capital.
3 shares at cum-rights price of RM 1.70 each (1.7*3) RM 5.10
1 new share issued at RM 1.25 RM 1.25
The Value of 4 shares is theoretically RM 6.35
Theoretical ex-rights price = RM 6.35 / 4
= RM 1.5875

Value of rights per rights issue = Ex-rights price – Issue price

= RM 1.5875 – RM 1.25
= RM 0.3375
Since you owned 3,000 shares, you will have the rights to subscribe for 1,000 new shares at
RM 1.25 each and sell them immediately after issued at RM 1.5875 each. By sell-off all your
rights, you can receive RM 337.50

Yes, it would matter.

Alternative #1: Right are allowed to lapse
Before the rights issue, your total wealth is worth RM 5,100 (RM 1.70 * 3,000).
Assuming, the rights are allowed to lapse, total wealth will be reduced to RM 4,762.50 (RM
1.5875 * 3,000).
Alternative #2: If you take up or exercise all the rights to purchase 1,000 new shares
(3,000/3), you neither gain nor loss your wealth.
Market value of 3,000 existing shares ex-rights at RM 1.5875 each RM 4,762.50
Market value of 1,000 new shares ex-rights at RM 1.5875 each RM 1,587.50
Total wealth RM 6,350.00

Market value of 3,000 existing shares ex-rights at RM 1.70 each RM 5,100.00

(+) Investment to purchase 1,000 new shares at issue price of RM 1.25 RM 1,250.00
Total wealth RM 6,350.00

Alternative #3: Choose to sell off all the rights in the market, you neither gain nor loss your
wealth too.
Sale value of rights (1,000 * RM 0.3375) RM 337.50
Market value of 3,000 existing shares ex-rights at RM 1.5875 each RM 4,762.50
Total wealth RM 5,100.00

It is advisable for you to either take up the offer or sell of the rights. Though both
alternatives here do not affect your wealth, take up all the offers will allow you to maintain
your ownership proportion in the company. On the other hand, by sell off all the rights, your
ownership proportion will reduce.

Issue price:
Although the issue price for rights issue should be set low enough to secure acceptance by
existing shareholders who are asked to provide extra funds, but it should not be too low until
there will be excessive dilution in earnings per share.
Dilution of control:
Unless an existing shareholder take up all his rights, his proportion of total equity of the
company will be reduced.
Use of funds:
If the funds raised from rights issue are invested in profitable projects that earn a higher rate
of return than existing funds, the actual market price per share after the rights issue will be
higher than theoretical ex-right price.
 Step 1: Find the theoretical ex-rights price
Five existing shares at cum-rights price @ RM 2.00/share RM 10.00
Two new shares at issue price of RM 1.65/share RM 3.30
Seven shares will have a theoretical value of RM 13.30
Theoretical ex-rights price = RM 13.30/7 = RM 1.90 per share
Step 2: Find total earnings after rights issue
Existing earnings = 20% * 4,000,000 * RM 2.000 = RM 1,600,000
New funds raised from rights issue = RM 4,000,000 * (2/5) * RM 1.65
= RM 2,640,000
Earnings as a % of (+) earnings on new funds Existing earnings Total earnings after rights issue RM
new funds raised raised RM RM
(I) 15% 396,000 (264,000*0.15) 1,600,000 1,996,000 (396K + 1,600K)
(II) 20% 528,000 (264,000*0.20) 1,600,000 2,128,000 (528K + 1,600K)
(III) 25% 660,000 (264,000*0.25) 1,600,000 2,260,000 (660K + 1,600K)
Step 3: Find total market value of equity and market price per share after rights issue, given a
P/E ratio of 5
Total earnings after rights Total market value of equity after rights Market price per share after rights issue
issue RM issue RM RM
(I) 1,996,000 9,980,000 (1,996K * 5) 9,980 K
1.78 ( )
4,000 K +(4,000 K∗0.4 )
(II) 2,128,000 10,640,000 (2,128K * 5) 10,640 K
1.90 ( )
4,000 K +(4,000 K∗0.4 )
(III) 2,260,000 11,300,000 (2,260K * 5) 11,300 K
2.02 ( )
4,000 K +(4,000 K∗0.4 )
The theoretical ex-rights price as calculated earlier is RM 1.90 per share. The values from (i),
(ii), and (iii) are RM 1.78, RM 1.90, and RM 2.02 per share respectively. This shows that:-
If the additional funds from rights issue raised are expected to earn the same rate as existing
funds, the actual market price per share will be equal to the theoretical ex-rights price per
share $1.90 = $1.90
If the additional funds from rights issue raised are expected to earn a higher rate than existing
funds, the actual market price per share will be above the theoretical ex-rights price per share
$2.02 > $1.90 (Best case)
If the additional funds from rights issue raised are expected to earn a lower rate than existing
funds, the actual market price per share will be below the theoretical ex-rights price per share
$1.78 < $1.90 (Worst case)

Specific Learning Outcome: Identify various sources and methods that listed firms (or
corporations) can raise capital.
Net receipts from new issue = RM 25,000,000*95% = RM 23,750,000
post-tax profits from newly raised funds = RM 23,750,000*10% = RM 2,375,000
Total post-tax profits = RM 3,000,000 + RM 23,375,000 = RM 5,375,000
Total market value of equity = RM 5,375,000*8 = RM 43,000,000
Let X be number of new shares issued. Thus, total number of shares issued and outstanding
after new funds are raised is (6,000,000 + X).
Let P be the fair share price after the new issue.
Thus, we can set the following equation
(6,000,000 + X) * P = RM 43,000,000 Eq. (1)
Let Pd be the issue price, which is 0.9P (90% from the fair price). Substitute in EQ. (1)
Above: [Pd = 0.9P, P = Pd/0.9]
( 6,000,000+ X ) Pd
=RM 43,000,000
0.9
6,000,000Pd + XPd = RM 38,700,000
XPd = gross receipts from new issue = RM 25,000,000
Substitute into Eq. (2)
6,000,000Pd + RM 25,000,000 = RM 38,700,000
6,000,000Pd = RM 13,700,000
Pd = RM 2.2833
Since issue price Pd is RM 2.2833
Number of new shares to issue = RM 25,000,000 / RM 2.2833
= 10,949,065 shares
Market price per share after new issue = 2.2883 / 0.9 = RM 2.54
Total number of shares issued and outstanding after new issue
= 6,000,000 + 10,949,065 = 16,949,065 shares
If the issue price is too high, there will be under-subscription for the new shares, and as a
result underwriters have to buy up the unsold new issues. If the new issue of shares is not
underwritten, then the firm will not be able to raise enough new funds as it needs for its new
investment projects.
If the issue price is too low, there will be over-subscription for the new shares, and the firm
would have been able to raise the required capital by issuing lesser new shares by setting
slightly higher issue price. With a slightly higher issue price, number of new shares to be
issued will be lesser, and this reduce the extent of dilution of control to existing shareholders.