Question

A rights offering Question 16 options: a) is the least expensive way to raise capital. b) gives the firm a built-in market for new securities. c) will increase the shareholder's total valuation. d) will likely lead to considerably higher distribution costs.

Answer 1

Answer: b. gives the firm a built-in market for new securities.

Explanation:

Rights offering are issued by companies when such companies wants to generate additional capital. This may be necessary when such company wants to meet its financial obligations and therefore need extra capital.

A rights offering gives the firm a built-in market for new securities as the security holder are already aware of the company and just buys additional securities.