Rights and Warrants Practice Flashcards

This set of vocabulary flashcards covers key concepts regarding rights and warrants, including share types, dilution protection, and the role of underwriters.

Authorized shares

The maximum number of shares a company is legally allowed to sell to investors, established when the business officially forms as a corporation.

Issued shares

The number of shares a company actually sells to the public, which takes place during an initial public offering (IPO) or subsequent offerings.

Dilution

A reduction in an existing stockholder's percentage of ownership and voting power that occurs when a company issues new shares to the public.

Pre-emptive right

A protection for current stockholders that grants them the right to purchase newly issued shares before they are offered to public investors, preventing ownership dilution.

Intrinsic value

The immediate value of a security when its exercise price is lower than the current market price; rights are typically issued with this value.

Underwriter

An investment bank, such as Morgan Stanley, JP Morgan, or Goldman Sachs, that helps organizations market and sell securities to the public for a fee.

Rights Exercise Price

The fixed price, often discounted below the current market price, at which a rightsholder can purchase new shares of common stock.

Rights expiration period

The short-term duration for which rights are valid, typically expiring within $60$-$90$ days of issuance.

Warrants

Equity-related securities that provide the right to purchase shares at a fixed price, usually set above the current market price at the time of issuance.

Time value

The value of a security derived from the time remaining until its expiration; warrants carry significant time value because they often last $5$ years or longer.

Sweetener

An additional security, such as a warrant, attached to another offering (like a bond) to make the primary security more attractive to investors.

Subscription price

The price per share that rights holders pay to purchase new shares, which in the Bain Capital case study was set at $92.5\%$ of the market price.

Transferable

A characteristic of rights meaning they can be sold or traded in the market to other investors if the original holder does not wish to exercise them.

Secondary market

The marketplace where issued shares are traded among investors after the initial public offering has concluded.