8. Analysis of rights offering Aa Aa Some stockholders have a preemptive right t

Question

8. Analysis of rights offering Aa Aa Some stockholders have a preemptive right that allows them to maintain their ownership percentage in the company by purchasing additional shares of any new stock issues Rights offerings, like preemptive rights, prevent dilution of stock for existing shareholders when new shares are issued. Which of these companies are likely to make a rights offering? O Companies that need to raise additional capital to fund growth projects O Companies with excess free cash flow that can be used to fund growth projects Suppose you own 1,000 shares of Eon Satellite Co. You received an announcement on December 15 that stated Eon Satellite Co. plans to sell an additional 2 million shares of common stock through a rights offering to shareholders as of January 15. The current market price of the Eon Satellite Co.'s shares is $44.80 per share, and as per the announcement of the offering, the subscription price of the rights is $39.20. As an active shareholder, you collect and calculate the following information to use in your analysis of the rights offering Your review of your share transaction details reveals that you bought 800 shares of Eon Satellite Co. on January 13 and 200 shares on January 15. This means that you have Eon Satellite Co. has 14 million shares of common stock outstanding. Thus, each right will enable you to buy shares that trade with rights-on and shares that trade ex-rights. shares through the rights offering, and it would take rights to purchase 1 new share. Each stockholder receives 1 right for each share currently held. You will be eligible to purchase new shares in the new share offering.

Explanation / Answer

Public held companies in order to raise money sometime provide additional stock to the existing common shareholders that enable the stockholders to keep their interest underlying the company intact. New securities are being issued by the companies planning to raise money in this manner. The securities are generally issued at lower rate. Company make sure that they will offer shareholder with the privilege to acquire extra stock at low rate and will sell a sufficient amount for raising the required funds. This special privilege is also known as pre-emptive rights and a document is provided by the company stating the privilege provided to the stock holder. Thus it is ascertained that the company requiring raising extra capital to provide funding to its growth projects will likely to make such kind of right offering rather than a company having excess free cash flow.

Hence, "option 1" is correct

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