Question

Question During a rights offering, the underlying stock is said to sell “rights-on” and “ex-rights.” Explain the meaning of these terms and their significance to current stockholders and potential stockholders.

Short answer

Answer

The shares that carry the rights are called rights-on and the shares from which the rights have been removed is called ex-rights shares. It is the stockholder’s responsibility to determine if they want to exercise the option, sell the shares at rights-on, or sell ex-rights shares.

Step-by-step solution

Meaning of the rights offering

Rights offering refers to the process of issuing the shares that carry additional rights with it. These shares provide additional rights which the shareholders can utilize on a future date.

Meaning of rights-on

Rights-on means that when the stocks are initially issued then it provides the stockholders with the right to a future purchase of stocks. The rights-on stockholders have the right to use or sell the rights at the time of trading.

Meaning of ex-rights

Ex-rights mean that after a specified time, the stocks will become ex-right and will not carry the right to a future purchase.The value of the stock will decline when it becomes ex-rights.

Significance to current and potential stockholders

These terms are significant to the current and potential stockholders as theyhave to decide if they want to exercise the option, sell their shares at a high price when it is rights-on or sell it at a lower price when they are ex-rights.