Decision Making

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------------------------------------------------- CHAP 19 When a company issues securities to the general public, it usually uses the services of an investment banker who underwrites (purchases at a fixed price on a fixed date) new securities for resale. For this service, investment bankers receive the difference, or underwriting spread, between the price they pay for the security and the price at which the security is resold to the public. There are three primary means by which companies offer securities to the general public: 1) Traditional (or firm commitment) underwriting If the issue does not sell well, either because of an adverse turns in the, market or because it is overpriced, the underwriter, not the company,…show more content…
The stock is therefore said to trade “rights-on” prior to the ex-rights date. On or after the ex-rights date, the stock is said to trade “ex-rights.” That is, the stock is traded without the rights attached. Pas pigé: Suppose that a rights offering has been announced and that the stock is still selling “rightson.” An investor wishing to be sure of owning one share of stock trading “ex-rights” could buy one share of stock just before the stock went “ex-rights” for the “rights-on” market price of the stock and simply hold the stock. Alternatively, the investor could purchase the number of rights necessary to purchase one share, set aside an amount of money equal to the subscription price, and wait until the subscription date to purchase the stock. The difference between the two options is that the former gives the investor one right in addition to one share of stock. Warning: We should be aware that the actual value of a right may differ somewhat from its theoretical value because of transactions costs, speculation, and the irregular exercise and sale of rights over the subscription period. However, arbitrage acts to limit the deviation of the actual value from the theoretical value. Standby Arrangement A measure taken to ensure the complete success of a rights offering in which an investment banker or group of investment bankers agrees to “stand by” to underwrite any

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