Other Equity Securities (3.9)

rights of ADR owners

- has most of the rights common stockholders normally hold - right to receive dividends when declares - don't typically have voting rights

ADRs are registered

ADRs are registered on the books of US banks - dividends are sent to the custodian banks as registered owners - the banks collect the payments and convert them into US dollars

Which of the following statements regarding warrants are TRUE? 1-They pay dividends. 2-They represent ownership in the issuing corporation. 3-They allow for the purchase of common stock at a fixed price. 4-They do not give holders voting rights.

Ans: 3 and 4 Holders of warrants have the right to buy stock from the issuer at a stated price for a specific time period. They do not pay dividends which are only paid to stockholders, nor do they give holders voting rights. The owner of the warrant does not own the stock until the warrant is exercised.

If a corporation attaches warrants to a new issue of debt securities, which of the following would be a resulting benefit to the corporation? A- Dilution of shareholder's equity B- Reduction of the number of shares outstanding C- Reduction in the debt securities' interest rate D- Increase in EPS

Ans: Reduction in the debt securities' interest rate Usually, a warrant is issued along with a debt instrument, an enhancement that allows the issuer to offer a slightly lower rate of interest.

ADR owners have all the following rights EXCEPT A- Right to receive dividends in US dollars B- Right to receive the underlying foreign security C- Right to sell in the secondary market D- Right to sell the ADR in the foreign market

Ans: The Right to sell the ADR in the foreign market The purpose of the ADR is to facilitate trading in U.S. markets. The ADR can only be traded in the United States. If the owner exercises the right to obtain the actual foreign security, it may be sold overseas.

GC, Inc., is proposing an additional public offering of common stock. It conducts a rights offering to its current shareholders at $55 per share, plus 5 rights. If the market price of GCI is $70 after the ex-rights date passes, what is the value of 1 right?

Because the stock is selling ex (after ex-rights), the formula is ($70 − $55) / 5. ($70 − $55 = $15) ($15 / 5 = $3).

derp

Declaration, Ex, Record, Payable

rights offering

allows stockholders to purchase common stock below the current market price - valued separately from the stock and trade in the secondary market

warrant

certificate granting its owner the right to purchase securities from the issuer at a specified price - long term - on issuance, exercise price is higher than the market price - may trade with or separate from the units - offered as a sweetener for another security [bonds, preferred stocks] - often bundled as units - when first issued, a warrant's exercise price is set somewhere above the stock's market price

subscription right

certificate representing short-term (typically 30-45 days) priviledge to buy additional shares of a corporation - one right is issued for each common stock share outstanding

ex-rights

without rights

delivery of foreign security for an ADR

- adr owners have the right to exchange their adr certificates for the foreign shares they represent - can return the ADR to the depository banks, which cancel the ADRs and deliver the underlying stock

when a customer holds a penny stock

- bds must provide a monthly statement of each account to the customer - must indicate the market value and number of shares for each penny stock held in the account as well as the issuer's name

Rights characteristics

- short-term - on issuance, exercise price below the market price - may trade or separate from the common stock - offered to existing shareholders with preemptive rights

a stock holder who receives rights may receive

- the ability to exercise the right to buy stock by sending the rights certificate and a check for the required amount to the rights agent - sell the rights and profit from their market value - let the rights expire and lose their value

Sponsored ADRs

- the foreign company sponsors the issues to increase its ownership base - provide holders with financial statements in english - sometimes referred to as ADS [American Depository Shares] - nonsponsored ADRs are issued by banks without the assistance and participation of the issuer

taxes on adrs

-The foreign income tax may be taken as a credit against any US income taxes owed by the investor

New Offering: 800,000 units at $6 per unit. Each unit has 2 shares of common stock and 1 warrant. Each warrant is to purchase ½ share of common stock. Based on the information above, how many shares of stock will be sold, and how many warrants will be sold?

1.6 million shares and 800,000 warrants Warrants may be distributed to stockholders in an underwriting as part of a unit. The warrant is a form of bonus to entice investors to purchase the unit. As each unit contains 2 shares, 1.6 million shares are being distributed. As each unit also includes 1 warrant, 800,000 warrants are being distributed.

cum rights

A term describing stock trading with rights.

A member of the investment banking department of ABC securities is explaining some of the advantages and disadvantages of rights and warrants to the board of directors of XYZ Corporation. Which of the following statements could he make? 1-The exercise prices of stock rights are usually below CMV of the underlying security at time of issue. 2-The exercise prices of warrants are usually above CMV of the underlying security at time of issue. 3-Both rights and warrants may trade in the secondary market and may have prices that include a speculative (time) value. 4-Warrants are often issued attached to a bond issue to reduce the interest costs to the issuer.

All All are true statements. The exercise prices of stock rights are usually below CMV of the underlying security at time of issue. The exercise prices of warrants are usually above CMV of the underlying security at time of issue. Both rights and warrants may trade in the secondary market and may have prices that include a speculative (time) value. Warrants are often issued attached to a bond issue to reduce the interest costs to the issuer.

Gargantuan Computers, Inc. (GCI) conducts a rights offering to its current shareholders at $50 per share, plus 1 right. If the current market price of GCI is $70, what is the value of one right before the stock trades ex-rights?

The stock is trading cum rights (before the ex-date). The formula to calculate the value of one right before the ex-date is follows: CMV − subscription price / Number of rights to purchase 1 share + 1. Therefore, one right is valued at $10, computed as ($70 − $50) / 2 = $10.

penny stocks

otc, less than 5/share

A corporate offering of 200,000 additional shares to existing stockholders may be made through a:

rights offering A rights offering is an offering of additional shares of stock to existing shareholders.