Preemptive Rights (Subscription Rights)
Chapters in this video
- 0:00 The dilution problem and Carlo's pizza empire
- 0:34 Rights are not shares: no voting, no dividends
- 2:19 Subscription price below market and the 30-to-90-day life
- 3:36 Cum-rights versus ex-rights and the T+1 record date rule
- 4:22 Theoretical value formulas: cum-rights plus 1, ex-rights no plus 1
- 5:38 Standby underwriting as firm commitment
- 6:19 Rapid-fire exam recap
What this video covers
- What preemptive rights are, why they are granted by the corporate charter, and how they let shareholders maintain proportionate ownership
- Why rights holders have no voting rights and receive no dividends until rights are actually exercised and shares are purchased
- The three choices rights holders face: exercise at the subscription price, sell on the secondary market, or let expire worthless
- Why the subscription price is set below market value for rights (the opposite of warrants), and why rights expire in 30 to 90 days while warrants last years
- How cum-rights and ex-rights differ, and why the ex-rights date equals the record date under T+1 settlement
- How to calculate the theoretical value of one right using the cum-rights formula (add 1 to the denominator) versus the ex-rights formula (no plus 1)
- What standby underwriting is, why it is a firm commitment, and how it guarantees the issuer raises full capital
Read the full lesson, free
This video's complete written lesson is free to read in the CertFuel app, no signup wall. When you're ready to drill the topic, the full Series 7 course adds adaptive practice questions and spaced-repetition flashcards.