Preemptive Rights (Subscription Rights)
Chapters in this video
- 0:00 Dilution and the pizza shop analogy
- 1:28 Preemptive rights basics and the voting rights trap
- 2:38 Rights vs warrants: duration, subscription price, and intrinsic value
- 4:27 Cum-rights vs ex-rights timing crossroads
- 5:21 Cum-rights formula with plus-one
- 6:21 Ex-rights formula and the price gap-down reality
- 7:15 Standby underwriter firm commitment mechanics
- 8:12 Rapid-fire exam recap
What this video covers
- Why preemptive rights exist, and how one right per share on the record date lets a stockholder maintain proportionate ownership through a new issuance
- What shareholder privileges rights holders lack: no voting rights and no dividends until after exercise
- Why rights expire within 30 to 90 days, carry a subscription price below market value, and how this differs from long-term warrants with exercise prices above market
- The three choices a rights holder has: exercise, sell on the secondary market, or expire worthless
- How cum-rights and ex-rights dates determine who receives the rights, and why the ex-rights date follows the registration statement's effective date (not the dividend-style record date convention)
- How to calculate cum-rights value with +1 in the denominator, and ex-rights value without the +1, and why the apparent price jump is neutralized by the stock's gap-down on the ex-date
- What a standby underwriter does in a firm commitment: purchases unexercised shares, guarantees the issuer's capital, and earns a fee for bearing the risk
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