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Chapter 5: 6DQ (page 451)

Question During a rights offering, the underlying stock is said to sell 鈥渞ights-on鈥� and 鈥渆x-rights.鈥� Explain the meaning of these terms and their significance to current stockholders and potential stockholders.

Short Answer

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Answer

The shares that carry the rights are called rights-on and the shares from which the rights have been removed is called ex-rights shares. It is the stockholder鈥檚 responsibility to determine if they want to exercise the option, sell the shares at rights-on, or sell ex-rights shares.

Step by step solution

01

Meaning of the rights offering

Rights offering refers to the process of issuing the shares that carry additional rights with it. These shares provide additional rights which the shareholders can utilize on a future date.

02

Meaning of rights-on

Rights-on means that when the stocks are initially issued then it provides the stockholders with the right to a future purchase of stocks. The rights-on stockholders have the right to use or sell the rights at the time of trading.

03

Meaning of ex-rights

Ex-rights mean that after a specified time, the stocks will become ex-right and will not carry the right to a future purchase.The value of the stock will decline when it becomes ex-rights.

04

Significance to current and potential stockholders

These terms are significant to the current and potential stockholders as theyhave to decide if they want to exercise the option, sell their shares at a high price when it is rights-on or sell it at a lower price when they are ex-rights.

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Most popular questions from this chapter

The Pioneer Petroleum Corporation has a bond outstanding with an \(85 annual interest payment, a market price of \)800, and a maturity date in five years. Find the following:

a. The coupon rate.

b. The current rate.

c. The yield to maturity

Becker Brothers is the managing underwriter for a 1.45-millon-share issue by Jay鈥檚 Hamburger Heaven. Becker Brothers is 鈥渉andling鈥� 10 percent of the issue. Its price is \(27 per share, and the price to the public is \)28.95.

Becker also provides the market stabilization function. During the issuance, the market for the stock turns soft, and Becker is forced to purchase 50,000 shares in the open market at an average price of \(27.50. It later sells the shares at an average value of \)27.20.

Compute Becker Brother鈥檚 overall gain or loss from managing the issue.

The Hamilton Corporation Company has 4 million shares of stock outstanding and will report earnings of \(6,910,000 in the current year. The company is considering the issuance of 1 million additional shares that can only be issued at \)30 per share.

a. Assume that Hamilton Corporation Company can earn 7.0 percent on the proceeds. Calculate the earnings per share.

b. Should the new issue be undertaken based on earnings per share?

Midland Corporation has a net income of \(19 million and 4 million shares outstanding. Its common stock is currently selling for \)48 per share. Midland plans to sell common stock to set up a major new production facility with a net cost of \(21,120,000. The production facility will not produce a profit for one year, and then it is expected to earn a 13 percent return on the investment. Stanley Morgan and Co., an investment banking firm, plans to sell the issue to the public for \)44 per share with a spread of 4 percent.

c. What are the earnings per share (EPS) and the price-earnings ratio before the issue (based on a stock price of $48)? What will be the price per share immediately after the sale of stock if the P/E stays constant?

The trustee in the bankruptcy settlement for Titanic Boat Co. lists the following book values and liquidation values for the assets of the corporation. Liabilities and stockholders鈥� claims are also shown.

Assets

Book value

Liquidation value

Accounts receivables

\(1,400,000

\)1,200,000

Inventory

\(1,800,000

\)900,000

Machinery and equipment

\(1,100,000

\)600,000

Building and plant

\(4,200,000

\)2,500,000

Total assets

\(8,500,000

\)5,200,000

Liabilities and stockholder鈥檚 claims

Liabilities

Accounts payable

\(2,800,000

First lien, secured by machinery and equipment

\)900,000

Senior unsecured debt

\(2,200,000

Subordinated debenture

\)1,700,000

Total liabilities

\(7,600,000

Stockholder鈥檚 claims

Preferred stock

\)250,000

Common stock

\(650,000

Total stockholder鈥檚 claims

\)900,000

Total liabilities and stockholder鈥檚 claims

\(8,500,000

c. Assuming the administrative costs of bankruptcy, workers鈥� allowable wages, and unpaid taxes add up to \)400,000, what is the total remaining asset value available to cover secured and unsecured claims?
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