Accounting Online Program Certification Practice Test

What type of issue did Mercury Ltd make to raise finance for expansion?

1. Bonus issue

2. Rights issue

3. Share split

4. Capital reduction

The correct answer is: Rights issue

A rights issue is a method companies use to raise additional finance by offering existing shareholders the opportunity to purchase new shares at a discounted price to the market value. This approach allows shareholders to maintain their proportionate ownership in the company and provides the necessary funds for expansion projects, such as new product lines, geographical expansion, or other capital ventures. In the context of Mercury Ltd's decision to pursue a rights issue, it indicates that the company wanted to ensure that the current shareholders could contribute to the funding while keeping their existing equity stake intact. This route is favored by many companies because it can be seen as a way to raise funds without incurring debt, thus avoiding interest obligations that come with borrowing. The other options represent different strategies for finance management, but they do not align with Mercury Ltd's needs for expansion. A bonus issue refers to an issuance of additional shares to existing shareholders without raising capital, a share split involves increasing the number of shares while decreasing the nominal value to make shares more affordable, and capital reduction is focused on reducing the company's share capital, generally aimed at improving financial metrics rather than raising funds.