Dilution

A rights offering lets existing shareholders:

1. A.Buy new shares at a discount to maintain proportional ownershipCorrect - preemptive rights prevent dilution.
2. B.Sell shares at a premiumRights run in the opposite direction on both counts. They allow a shareholder to buy additional shares, and the subscription price is set below the market rather than above it.
3. C.Convert bonds to stockExchanging debt for equity is the feature of a convertible bond and belongs to bondholders. A rights offering is directed at people who already own the common stock.
4. D.Receive an extra voteVoting power is protected here indirectly, not by handing out extra votes. Buying the newly offered shares keeps the holder's percentage of the company intact, which preserves the voting weight already held.

Why: Rights let current shareholders buy new shares at a discount to preserve their proportional ownership (anti-dilution).

When the holder of a warrant exercises it, the shares delivered come from

1. A.another investor who wrote the warrant and must deliver from his own holdings.Wrong. That describes an option writer, and a warrant has an issuer rather than a writer.
2. B.the issuing company, which creates new shares and receives the exercise proceeds.Correct. The issuer is the counterparty, which is why exercise raises capital and dilutes existing holders.
3. C.the open market, where the clearing corporation buys shares in order to deliver them.Wrong. No clearing corporation interposes itself in a warrant exercise in that way.
4. D.the underwriter that distributed the security to which the warrant was attached.Wrong. An underwriter distributes an offering and takes on no continuing delivery obligation.

Why: A warrant is issued by the company itself and is a long-dated subscription right, so exercising it is a transaction between the holder and the issuer rather than between two investors. The company creates and issues new shares and receives the exercise price as fresh capital, which is why a warrant issue raises money for the business while an option does not. That difference is also the source of the dilution a warrant causes to existing shareholders. A listed option, by contrast, is written by another investor and its exercise moves existing shares from one holder to another.

A private company sells newly created shares to investors and, in the same week, one of its founders sells part of her existing stake to the same investors. Which sale is the primary offering, and why does the distinction matter to the placement agent?

1. A.The founder sale, because she sold first and set the price the issuer then matched.Wrong. Timing and pricing sequence have nothing to do with which leg is primary.
2. B.Both sales, because the two closed in the same week to the same group of buyers.Wrong. Two sales in one week remain two sales, and only one of them creates new securities.
3. C.The issuer sale of newly created shares, because the proceeds reach the issuer and the outstanding count rises.Correct. Primary and secondary are sorted by who receives the money, not by who the buyers are.
4. D.Neither, because a primary offering must be registered with the SEC to be called primary.Wrong. A primary offering can be registered or exempt; the label describes the seller, not the registration status.

Why: A primary offering is a sale of securities by the issuer in which the proceeds go to the issuer and the number of shares outstanding increases. A secondary offering is a sale by an existing holder, in which the proceeds go to that holder and nothing new is created. The founder sale is therefore secondary even though the buyers and the price may be identical. The distinction matters because the Series 82 registration category covers the solicitation and sale of private placements in a primary offering, and because dilution, use of proceeds and the issuer own liability all attach to the primary leg alone.

An issuer attaches detachable warrants to a bond offering. The principal effect for the issuer is that

1. A.it need not record the bonds as a liability, since the warrants offset them.Wrong. The borrowing remains a liability whatever equity feature is attached to it.
2. B.repayment of the bonds is guaranteed out of the eventual warrant proceeds.Wrong. The warrants may never be exercised, so repayment cannot depend on them at all.
3. C.it can offer a lower coupon, because the warrants add value for the buyer.Correct. Buyers pay for the equity participation by accepting less interest on the debt.
4. D.the interest rate risk borne by the bondholder is removed by the attachment.Wrong. The bond still reprices with rates, and the warrant simply adds an equity claim beside it.

Why: A warrant attached to a bond is a sweetener: it hands the buyer a long-dated equity participation alongside the debt, and buyers will accept a lower coupon in exchange for it. The issuer therefore reduces its cash interest cost now and accepts the possibility of dilution later if the warrants are exercised. Because the warrants are detachable, the holder can sell them separately and keep the bond, so the two components trade on their own merits after issue. The debt remains a liability throughout, and nothing about the arrangement secures its repayment.