What is the impact of a rights issue on Basic EPS?

A rights issue is a way for a company to raise additional capital by offering existing shareholders the opportunity to purchase additional shares, typically at a discount to the current market value. This process dilutes existing shareholders' equity, and its impact on Basic Earnings Per Share (EPS) is significant.

When shares are issued for less than their current market value, the price at which these new shares are offered can lead to a decrease in the overall EPS, as the earnings are now spread over a larger number of shares. This is essential in understanding how a rights issue influences the calculation of EPS. While it might seem that issuing shares at a discount could increase funds and potentially boost earnings, the dilution effect resulting from the increased number of shares typically outweighs this benefit.

Therefore, the nature of the shares being issued—specifically at a price lower than the market—directly affects the Basic EPS, usually leading to a lower EPS post-issue when compared with pre-issue figures, revealing the nuances of how capitalization affects earnings measurement on a per-share basis.