A company is raising funds for a new project by issuing new equity in a rights o

Question

A company is raising funds for a new project by issuing new equity in a rights offer. Mr. Smith, one of the company’s shareholders, decides to sell his rights. Which form of loss from dilution would Mr. Smith necessarily experience?

Select one:

a. dilution of book value

b. dilution of market value

c. dilution of percentage ownership

d. dilution of earnings per share

e. none of the above

Direct long-term financing differs from a public debt issue in terms of

Select one:

a. higher registration costs for direct financing.

b. higher distribution costs for direct financing.

c. more restrictive covenants for direct financing.

d. higher negotiation costs during default for direct financing.

e. higher interest rates in public debt issues.

Explanation / Answer

Question - 1

e. none of the above

If we start with (c) the dillution of percentage ownership is true only with direct public offer and not with rights issue. In the case of (a), (b) and (d) respective dillutions are only myths about new issue of equity which is not directly due to issue.

To put in simple words, dillution mentioned in (a),(b) and (d) are outcomes of NEGATIVE NPV of the project being taken up and due to issue of new equity.

Question - 2

c. more restrictive covenants for direct financing.

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