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Understanding Rights Offerings and Valuation

A rights offering allows companies to raise capital by selling shares at a price lower than the current market price, affecting the share price based on new shares issued. The value of a right is calculated as the difference between the old share price and the new share price after the offering. Rights offerings can lead to dilution for existing shareholders but provide flexibility for stockholders to exercise or sell their rights.

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9 views6 pages

Understanding Rights Offerings and Valuation

A rights offering allows companies to raise capital by selling shares at a price lower than the current market price, affecting the share price based on new shares issued. The value of a right is calculated as the difference between the old share price and the new share price after the offering. Rights offerings can lead to dilution for existing shareholders but provide flexibility for stockholders to exercise or sell their rights.

Uploaded by

Muhammad Fajri
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

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

© 2019 McGraw-Hill Education Limited. All Rights Reserved. 15-1


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?

© 2019 McGraw-Hill Education Limited. All Rights Reserved. 15-2


Rights Offering Example
continued
Number of new shares to be issued
Funds to be raised 10,000,000
  500,000
Subscription Price 20
Number of rights to purchase one new share
Old Shares 5,000,000
  10
New Shares 500,000
M 0  S 25  20
Value of a right   $0.45
N 1 10  1

© 2019 McGraw-Hill Education Limited. All Rights Reserved. 15-3


Effect of Rights on Stock Prices
• 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”

© 2019 McGraw-Hill Education Limited. All Rights Reserved. 15-4


More on Rights Offerings
• 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
© 2019 McGraw-Hill Education Limited. All Rights Reserved. 15-5
Dilution
• Dilution is a loss in value for existing
shareholders
• Percentage ownership – shares sold to the
general public without a rights offering
• Market value – firm accepts negative NPV
projects
• Book value and EPS – occurs when market-to-
book value is less than one

© 2019 McGraw-Hill Education Limited. All Rights Reserved. 15-6

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