15-0 Rights Offerings: Basic Concepts 15.8 Issue of common stock offered to existing shareholders Allows current shareholders to avoid the dilution that.

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15-0 Rights Offerings: Basic Concepts 15.8 Issue of common stock offered to existing shareholders Allows current shareholders to avoid the dilution that can occur with a new stock issue “Rights” are given to the shareholders Specify number of shares that can be purchased Specify purchase price Specify time frame Rights usually trade on the same exchange as the company’s stock LO4

15-1 The Value of a Right The price specified in a rights offering is generally less than the current market price The share price will adjust based on the number of new shares issued The value of the right is the difference between the old share price and the “new” share price LO4

15-2 Rights Offering Example Suppose a company wants to raise $10 million. The subscription price is $20 and the current stock price is $25. The firm currently has 5,000,000 shares outstanding. How many shares have to be issued? How many rights will it take to purchase one share? What is the value of a right? LO4

15-3 Rights Offering Example continued LO4

15-4 More on Rights Offerings Ex-rights – the price of the stock will drop by the value of the right on the day that the stock no longer carries the “right” Standby underwriting – underwriter agrees to buy any shares that are not purchased through the rights offering Stockholders can either exercise their rights or sell them – they are not hurt by the rights offering either way Rights offerings are generally cheaper Until the early 1980’s, rights offerings were the most popular method of raising new equity in Canada Bought deals have replaced rights offers as the prevalent form of equity issue LO4