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However if the investor allows her rights to expire

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Unformatted text preview: ck price. However, if the investor allows her rights to expire, she suffers a loss equal to the decline in the value of the stock. | v v 127 | e-Text Main Menu | Textbook Table of Contents | Study Guide Table of Contents Th e Righ ts Offerin gs Puz zle (p. 473) Pure rights offerings (i.e., those without standby underwriting) are less expensive for the issuing firm than other forms of equity offerings; in addition, pure rights offerings permit shareholders to maintain their proportionate own ersh ip of the firm. Despite these advantages of rights offerings, underwritten cash offerings are the dom in ant form of new equity issues. IX. DIL UTIO N (p. 474) Dilution of Prop ortionate Ownership (p. 474) Dilution is a decrease in the value of the com mon stockholders' position due to the issue of new com mon stock. Dilution of prop ortionate own ership occurs when the shareholder does not purchase any of the new shares, his proportional share of own ersh ip will decrease. Dilution of Valu e: Boo k versu s M arket Valu es (p. 475) Dilution of value occurs when new shares are sold below book value and the firm's ROE falls. This is called accou nting dilution. M arket value dilution is a decrease in the market value per share of the firm's stock following the issue of new shares of com mon stock and occurs if the funds are used to invest in negative NP V projects. X. ISSUING LO NG-T ERM DE BT (p. 477) A public issue of bonds requires that the issuing firm register the issue with the SEC in a process similar to that required for a com mon stock issue. However, mo re than 50% of all debt is directly placed , either in the form of term loans or private placem ents. A term loan is a direct business loan that is amo rtized over a period of one to five years. The major lenders are com mercial banks and insurance com panies. A private placemen t is similar to a term loan but the maturity is generally longer. XI. SH ELF RE GIST RATI ON (p. 477) In 1983, the SEC perman ently adopted Ru le 415, which permits a corporation to register an offering it expects to sell within the next two years. This shelf registration procedure permits the corporation to sell a portion of the issue at any time during the two-year period. To qualify for shelf registration, a corporation mu st be rated investmen t grade, mu st not have defaulted on its debt or violated the Securities Act in the past three years, and mu st have equity market value in excess of $150 million. KE Y TE RMS AND CO NCE PTS Best efforts und erwriting - underwriter sells as mu ch of the issue as possible, but can return any unsold shares to the issuer without financial responsibility. (p. 454) Dilution - loss to existing shareholders of own ersh ip , market value, book value, or EPS . (p. 474) Ex-righ ts date - beginning of the period when stock is sold without a recently declared right, norm ally two trading days before the holder-of-record date. (p. 470) Firm com mitm ent und erwriting - underwriter buys the entire issue, assum in g full financial responsibility for any unsold shares. (...
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