Question 72

A company's board has decided to increase the number of outstanding shares in the company by issuing new shares to existing shareholders in a set proportion. This is known as a Rights offering.

A rights offering allows existing shareholders to purchase additional shares at a set price, typically in proportion to their current holdings, thus increasing the total number of outstanding shares in the company.

A) Stock split.

A stock split involves dividing existing shares into multiple shares to reduce the trading price per share, while maintaining the overall market capitalization of the company. This does not involve issuing new shares to shareholders in a set proportion, making it an incorrect option in this context.

B) Tender offer.

A tender offer is a proposal by a company to purchase some or all of shareholders' shares at a specified price, usually at a premium. This process does not relate to issuing new shares to existing shareholders, therefore it is not applicable here.

C) Rights offering.

A rights offering is indeed the correct term for the process where a company issues new shares to existing shareholders in a predetermined ratio, allowing them to maintain their proportional ownership in the company. This aligns directly with the scenario described in the question.

D) Stock buyback.

A stock buyback occurs when a company repurchases its own shares from the marketplace, reducing the number of outstanding shares. This action does not involve issuing new shares to existing shareholders and is therefore incorrect in this context.

Conclusion

The rights offering is the only option that accurately describes the scenario of a company increasing the number of outstanding shares by offering new shares to existing shareholders in a set proportion. Other options, such as stock splits, tender offers, and stock buybacks, do not pertain to the issuance of new shares to current shareholders, thus reinforcing that the rights offering is the definitive correct choice.