Job Function 2 Flashcards
Suitability & Risk and Required Disclosures (28 cards)
- short term
- on issuance, exercise price is below market price
- may trade with or separate from the common stock
- existing shareholder with preemptive rights
rights
warrants
- long term
- exercise price is higher than CMV
- may trade with or separate from units offered
- considered a sweetner for another security
What happens when some shareholders fail to exercise their rights?
Shareholders may let them lapse because they do not understand the right, lack the funds, or ignore the notice.
These situations can lead to a dilution of ownership for those shareholders who do not act.
What is the role of an investment banker or underwriter in a rights offering?
They assist the issuer in bringing new issues to market.
This includes facilitating the sale of shares during a rights offering.
What is a standby underwriter?
A broker-dealer that purchases unsold shares in a rights offering.
They ensure that the offering is successful by committing to buy remaining shares.
What occurs when current stockholders do not exercise their preemptive rights in an additional offering?
The corporation has a standby underwriter to purchase unsold shares.
This helps maintain the offering’s integrity and ensures all shares are sold.
What type of commitment does a standby underwriter make?
A firm commitment to buy all shares not subscribed to by current stockholders.
This means the underwriter guarantees the purchase at the subscription price.
issued - treasury =
outstanding
treasury =
issued - outstanding
What does ‘cum rights’ mean in stock trading?
It refers to the period when a stock is traded with the rights to purchase additional shares.
What does ‘ex-rights’ mean in stock trading?
It refers to the period after the rights have been detached from the stock, and the stock is traded without those rights.
True or False: The theoretical value of a stock right can be calculated using the market price of the stock and the subscription price of the new shares.
True
Fill in the blank: The theoretical value of a right can be calculated as (Market Price - Subscription Price) / (Number of Rights Required + 1). This formula is used for calculating the value when trading _______.
cum rights
What is the formula to compute the theoretical value of a stock right trading ex-rights?
(market price - subscription price) / number of rights to purchase one share
What happens to the stock price when it goes ex-rights?
The stock price typically decreases to reflect the value of the rights that are no longer attached.
Multiple choice: Which of the following factors is NOT considered when calculating the theoretical value of a right? A) Market Price B) Subscription Price C) Time of Day D) Number of Rights Required
C) Time of Day
What is the impact of dilution on existing shareholders when new shares are issued?
Existing shareholders may experience a decrease in their ownership percentage and earnings per share.
True or False: The theoretical value of a right is the same as its market value.
False
Short answer: Why is it important for investors to understand the concept of cum rights and ex-rights?
It helps investors make informed decisions regarding their investments and understand the potential impact on stock value.
What does the Securities Act of 1933 regulate?
Activity in the primary market
What is the primary market?
The marketplace for new issues
What does the Securities Exchange Act of 1934 regulate?
Activity in the secondary market
What is the secondary market?
Buying and selling of securities once they have been distributed in the primary market
What is the main aim of the SEC under the Securities Exchange Act of 1934?
To protect investors
