Rights Warrants

Rights and Warrants ## Overview Rights and warrants are both securities that give the holder the right to buy stock at a specific price. They're related but different instruments, and the Series 7 tests you on the distinctions. --- ## Subscription Rights (Rights Offerings) When a company wants to raise more capital by issuing new shares, it risks diluting existing shareholders — suddenly their ownership percentage shrinks because there are more shares outstanding. To protect shareholders, companies issue subscription rights — short-term securities that let existing shareholders buy the new shares before the public, at a discount to the current market price. ### How Rights Work Scenario: ABC Corp trades at $50/share. The company needs to raise capital and will issue 1 million new shares at $45 (a $5 discount). Existing shareholders receive rights to buy new shares at $45. - Every shareholder receives one right per share owned - It takes a certain number of rights (plus cash) to buy one new share - Rights are short-lived — typically expire in 30–45 days - Rights trade on exchanges just like stock during this period ### Theoretical Value of a Right The exam may ask you to calculate a right's value: When stock is trading "rights-on" (before ex-rights date): > Value = (Market Price − Subscription Price) ÷ (Rights Required + 1) When stock is trading "ex-rights" (after ex-rights date): > Value = (Market Price − Subscription Price) ÷ Rights Required Example: Stock trades at $55. Subscription price is $50. 4 rights needed to buy 1 share. - Rights-on value: ($55 − $50) ÷ (4 + 1) = $5 ÷ 5 = $1.00 per right - Ex-rights value: ($55…