Question

The Direct Interactive Publishing Company is planning to raise $200 million dollars in new capital. There are currently 50 million shares outstanding with an estimated market price of $60 each. The corporate officers are debating whether to use a rights offering (with or without a standby underwriting) or have the issue fully underwritten. The company is currently listed on a regional exchange and plans to list on a national exchange after the security issue. List and explain three advantages/disadvantages of each method.

Answer 1

Solution

1. Rights Offering

Advantages

1. Helps to raise money

2. No shareholder approval needed

3.Market interest in the issuer's common stock generally peaks

Disadvantages

1. Shareholders may disapprove because of their concern with dilution

2. The offering may result in more concentrated investor positions

3. Additional required filings and procedures associated with the rights offering are too costly and time-consuming

2. Issue fully underwritten

Advantages

1. Ensures success of the proposed issue of shares

2. Enables a company to get the required minimum subscription

3. Reputation of the underwriter acts as a confidence to investors.

Disadvantages

1. The Stock Exchange, where the security is going to be listed must also be informed about the arrangements made with the underwriters.

2. May not be economical because underwriters may demand huge commission