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Chapter 5: 6DQ (page 451)

Question During a rights offering, the underlying stock is said to sell “rights-on” and “ex-rights.” 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’s 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

Question: The Bailey Corporation, a manufacturer of medical supplies and equipment, is planning to sell its shares to the general public for the first time. The firm’s investment banker, Robert Merrill and Company, is working with Bailey Corporation in determining a number of items. Information on the Bailey Corporation follows:

Bailey corporation

Income statement

For the year 20X1

Sales (all on credit)

\(42,680,000

Cost of goods sold

\)32,240,000

Gross profit

\(10,440,000

Selling and administrative expenses

\)4,558,000

Operating profit

\(5,882,000

Interest expense

\)600,000

Net income before taxes

\(5,282,000

Taxes

\)2,120,000

Net income

\(3,162,000

Bailey corporation

Balance sheet

As of December 31, 20X1

Assets

Current assets:

Cash

\)250,000

Marketable securities

\(130,000

Accounts receivables

\)6,000,000

Inventory

\(8,300,000

Total current assets

\)14,680,000

Net plant and equipment

\(13,970,000

Total assets

\)28,650,000

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

\(3,800,000

Notes payable

\)3,550,000

Total current liabilities

\(7,350,000

Long-term liabilities

\)5,620,000

Total liabilities

\(12,970,000

Stockholder’s equity:

Common stock (1,800,000 shares at \)1 par)

\(1,800,000

Capital in excess of par

\)6,300,000

Retained earnings

\(7,580,000

Total stockholder’s equity

\)15,680,000

Total liabilities and stockholder’s equity

$28,650,000

a. Assume that 800,000 new corporate shares will be issued to the general public. What will earnings per share be immediately after the public offering? (Round to two places to the right of the decimal point.) Based on the price-earnings ratio of 12, what will the initial price of the stock be? Use earnings per share after the distribution in the calculation.

The efficient market hypothesis is interpreted in a weak form, a semi strong form, and a strong form. How can we differentiate its various forms?

Corporate debt has been expanding very dramatically in the last three decades. What has been the impact on interest coverage, particularly since 1977? (LO16-1)

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 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?
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