©2012 McGraw-Hill Ryerson Limited 1 of 24 Learning Objectives 3.Characterize a rights offering as a method used to raise funds for the firm and calculate values of rights, shares and shareholder wealth during the rights-offering process. (LO3) 4.Describe poison pills and other provisions that make it difficult for outsiders to gain control of the corporation against management wishes. (LO4) 5.Characterize preferred shares as a type of security somewhere between debt and common stock. (LO5)

©2012 McGraw-Hill Ryerson Limited 2 of 24 Rights Offering An implementation of a preemptive right provision: – gives current shareholders the first option to purchase new shares – allows existing shareholders the same amount of control they have initially – shareholder receives 1 right for each share of stock owned LO3

©2012 McGraw-Hill Ryerson Limited 3 of 24 Figure 17-1 Time line during rights offering LO3

©2012 McGraw-Hill Ryerson Limited 4 of 24 Rights Offering Number of rights required to purchase one new share can be calculated as dividing the number of currently outstanding shares by the number of new shares. “Rights-on” or “Cum-rights”: -before the ex-rights date, the share and the right trade together; -the stock buyer gets both the share and the right. “ Rights-off” or “Ex-rights”: -on and after the ex-rights date, the share and the right trade separate; -the stock buyer gets the share only and the seller keeps the right. LO3

©2012 McGraw-Hill Ryerson Limited 5 of 24 Value of a Right R is the value of a right M e is the market value of stock—ex-rights (stock no longer carries a right) S is the subscription price N is the number of rights required to purchase a new share of stock R = M e − S N (17-4) R is the value of a right M 0 is the market value of the stock—rights-on (stock carries a right) S is the subscription price N is the number of rights required to purchase a new share of stock R = M 0 − S N + 1 (17-3) LO3

©2012 McGraw-Hill Ryerson Limited 6 of 24 Effect of Rights Offering As long as the shareholder exercises or sells his or her rights, he or she won’t suffer any wealth loss from a rights offering. Rights offering allows current shareholders to protect their current position in regard to voting rights and claims to earnings. Rights offering saves the company distribution costs. Rights offering may generate more interest in the company. LO3

©2012 McGraw-Hill Ryerson Limited 7 of 24 American Depository Receipts (ADRs) also called American Depository Shares (ADS) are certificates with a legal claim on an ownership interest in a foreign company’s common stock. They are considered to be more liquid, less expensive and easier to trade than buying the foreign company’s stock directly. LO3