What Is a Cash Call?

Introduction to Cash Call ===

In the world of finance, cash call is a term that is often used in relation to the raising of capital. Companies use cash call to raise funds from their shareholders in order to finance their operations or to undertake new projects. In this article, we will explore what cash call is, how it works, and its advantages and disadvantages. We will also discuss the difference between cash call and stock options, as well as cash call and rights issue.

Definition of Cash Call

Cash call is a process by which a company raises funds by issuing new shares to its existing shareholders. The shareholders are given the option to buy these new shares at a discounted price. The funds raised through cash call are usually used to finance the company’s operations, to pay off debt, or to undertake new projects.

How Cash Call Works

In a cash call, the company issues new shares to its existing shareholders at a discounted price. The shareholders are given a right to subscribe to these new shares in proportion to their existing shareholding. If a shareholder decides not to subscribe to the new shares, they can sell their right to subscribe to someone else. The proceeds from the sale of the right are usually referred to as the "nil-paid" or "nil-value" shares.

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Once the subscription period is over, the company issues the new shares to the shareholders who have subscribed to them. The new shares are usually issued at a discount to the market price of the existing shares. This means that the shareholders who subscribe to the new shares get them at a lower price than what they would have paid if they had bought them on the open market.

Advantages of Cash Call

One of the main advantages of cash call is that it allows companies to raise capital quickly and efficiently. Since the new shares are issued to existing shareholders, there is no need to go through the process of finding new investors. This can save the company a lot of time and money.

Another advantage of cash call is that it can be used to strengthen the company’s balance sheet. By raising funds through cash call, the company can reduce its debt levels and improve its financial position. This can make the company more attractive to investors and lenders.

Disadvantages of Cash Call

One of the main disadvantages of cash call is that it can dilute the value of existing shares. When new shares are issued, the total number of shares in the company increases. This means that the value of each individual share is reduced. This can be a concern for existing shareholders who may see the value of their investment decrease.

Another disadvantage of cash call is that it can be unpopular with investors. Shareholders may not be willing to subscribe to new shares if they feel that the company is not using the funds raised in a responsible manner. This can lead to a lack of investor confidence and a decline in the company’s share price.

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Difference Between Cash Call and Stock Option

Cash call and stock option are two different ways for companies to raise capital. In a cash call, the company issues new shares to its existing shareholders at a discounted price. In a stock option, the company grants its employees or executives the right to buy shares in the company at a set price.

The main difference between cash call and stock option is who is eligible to participate. In a cash call, only existing shareholders are eligible to subscribe to the new shares. In a stock option, only employees or executives are eligible to exercise their right to buy shares.

Cash Call vs. Rights Issue

Cash call and rights issue are two different ways for companies to raise capital. In a cash call, the company issues new shares to its existing shareholders at a discounted price. In a rights issue, the company offers its existing shareholders the right to buy new shares in proportion to their existing shareholding.

The main difference between cash call and rights issue is how the new shares are allocated. In a cash call, the new shares are allocated to those shareholders who subscribe to them. In a rights issue, the new shares are allocated to those shareholders who exercise their right to buy them.

Conclusion: Is Cash Call Right for You?

Cash call can be an effective way for companies to raise capital quickly and efficiently. However, it is important to weigh the advantages and disadvantages before deciding whether to participate. If you are an existing shareholder, you may want to consider whether the discount offered on the new shares is worth the potential dilution of your existing shares. If you are considering investing in a company that is planning a cash call, you may want to research the company’s financial position and its plans for using the funds raised.


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