SIE Understanding Products and Their Risks Question 39: Answer and Explanation

Question: 39

Which may typically occur with a rights issue?

• A. The subscription price will typically be higher than the current market price.
• B. The market value will typically rise when a rights offering is announced.
• C. Multiple rights may be needed to purchase a share of stock.
• D. Non-renounceable rights may be sold by current shareholders.

Correct Answer: C

Explanation:

C: Choice C is correct because a company may issue a right with a fractional ability to purchase a share of common stock. Choice A is incorrect because the subscription price will typically be lower than the current market price. Choice B is incorrect because the market price will typically fall when a rights offering is announced, as future dividends will be distributed among a larger quantity of common shares—unless the future profits are expected to soon increase proportionate to the increase in outstanding shares. Choice D is incorrect because non-renounceable rights may be exercised, or not used, as they cannot be sold.