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The management of Company X has decided to finance a new division exclusively using new common...

The management of Company X has decided to finance a new division exclusively using new common equity. One senior manager suggests making a rights offering. Explain what that entails and give one reason why this would be considered.

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A rights offering refers to the process of giving rights to the existing shareholders of the firm to purchase additional shares of the firm..The rights thus given are transferable by the share holders.In a rights offering the shareholders have an option or a right to purchase additional shares , but they are not obligated to do the same.In a rights offering the shares will be offered at a price lower than the current market price to the shareholders.Companies that are looking to raise funds for expansion may resort to rights offering..The reason to consider a rights offering is that , it can be done without the underwriting process and without shareholder approval.Another perk of doing so is that it will result in an increased demand for the shares of the company in the market.

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