10

Question 1

why raise capital through a rights offering

Answer 1

markets aren’t open for ordinary common share issue
co. wants existing shareholders to: (1) maintain proportionate holdings (2) acquire additional shares before anyone else.

Question 2

right

Answer 2

option to shareholder to acquire additional shares in proportion to number of shares owned.
shares are available up to expiration date at subscription price (aka offering price) usually lower than market price of shares at time of rights issue.

Question 3

intrinsic value of right during ex-rights period (starts one business day before the record date)

Answer 3

(market price of stock - subscription price)/(number of rights needed to buy one share)

Question 4

intrinsic value of right during cum-rights period

Answer 4

(market price of stock - subscription price)/(number of rights needed to buy one share +1)
Note: the +1 in the denominator adjusts for the pending drop in the market price on ex-date, or the first day when the stock trades without rights.