FIN 2704/2704X

Week 8
Stock Valuation
 Learning objectives
• Understand how stock prices depend on future dividends and
dividend growth
• Be able to compute stock prices using the Dividend Growth
Model (also called the Dividend Discount Model)
• Be able to compute a stock’s expected return from DGM/DDM
• Be able to compute stock prices using the Corporate Valuation
Model
• Be able to compute stock prices using Relative Valuation (also
called the Multiples Approach) (not examinable)
• Understand how securities are sold to the public and the role of
investment bankers (not examinable)
• Know what initial public offerings and rights issues are (not
examinable) 2
Ways that Stockholders Receive Cash Return

• If you buy a share of stock, you can receive cash in 2 ways:

1. The company pays dividends
2. You sell your shares, either to another investor in the
market (secondary market) or back to the company (when
a firm repurchases shares)

• As with bonds, the value of the stock is the present value of

these expected cash flows

3
 Dividends
• Dividends are cash disbursements to shareholders
– Firms are not required to pay dividends to their shareholders
(Dividends are declared at the discretion of the Board of
Directors).
– Dividends are not a liability of the firm until a dividend has been
declared by the Board.

• Dividends and Taxes

– Dividend payments are not considered a business expense;
therefore, they are not tax-deductible.
– In many jurisdictions, dividends received by individuals are taxed
as ordinary income.
– In Singapore, however, dividends are tax-exempt at the
individual shareholder recipient level.
4
 Value: Several Kinds
There are several types of “value”, namely:
1. _____ Value: The price paid (including betterments) to
acquire the asset (also called historical cost), less
accumulated depreciation.

2. ________ Value: The price of an asset as determined in a

competitive marketplace.

3. _________ Value: An estimate of what an asset is “really”

worth in theory. In finance, this real worth is estimated by the
present value of the expected future cash flows.

5
 Determinants of Intrinsic Value
• The primary determinants of the intrinsic value of an asset
are:
– ______ of the expected future cash flows.
– ________ of the expected future cash flows.
– The Required rate of return.

• Note that the intrinsic value of an asset can be, and often
is, different for each investor since each investor can have
different expectations (that’s what makes markets work).

6
 Intrinsic Value vs. Market Price/Value
Intrinsic value: an estimate of a stock’s “true” value based on accurate
risk & return data (amount, timing & riskiness of cash flows)
– An “estimated” value, not a precise objectively known measure
– Often referred to as an estimate of ‘fundamental value’

Market price/value: the actual current selling price of a stock. It is

based on perceived information as seen by the investor in the market.

The terms “Market price/value” and “Intrinsic value” are oftentimes used
interchangeably, but that may not be correct:
– Market prices/values are observable
– Intrinsic values are unobservable and can only be estimated

7
 Stock Value: 1-Period Example
• Suppose you are thinking of purchasing the stock of
Moore Oil, Inc. and you expect it to pay a $2 dividend
in 1 year’s time and you believe that you can sell the
stock for $14 at that time.

• If you require a return of 20% on investments of this

risk, what is the intrinsic value of this stock?

8
 Stock Value: 1-Period Example
Using a Time-Line:

0 1 2 3
20%

D1=$2 Expected dividend

+
P1=$14 Expected to sell stock at this price

CF1=$16 Total Funds Expected to be

Find PV received at the end of year 1

𝐶𝐹" $16
Intrinsic Value 𝑃! = " = " = $𝟏𝟑. 𝟑𝟑
(1 + 𝑟) (1 + 20%)
9
 Stock Value: 1-Period Example
Using a Financial Calculator:

INPUTS 1 20 0 16
N I/Y PV PMT FV
OUTPUT -13.33

Using Excel:

Intrinsic Value 𝑃! = $𝟏𝟑. 𝟑𝟑

10
 Stock Value: 2-Period Example
• Now what if you decide to hold the stock for 2 years?
• In addition to the dividend in 1 year’s time, you expect a
dividend of $2.10 and a stock price of $14.70 at the end of
year 2. Now, what is the intrinsic value of the stock?

11
 Stock Value: 2-Period Example
Using a Time-Line:
0 1 2 3
20%

D1=$2 D2=$2.10
+
P2=$14.70
CF1=$2 CF2=$16.80
Find PV

𝐶𝐹" 𝐶𝐹#
Intrinsic Value 𝑃! = " +
(1 + 𝑟) (1 + 𝑟)#
$2 $16.80
= " + # = $𝟏𝟑. 𝟑𝟑
(1 + 20%) (1 + 20%) 12
 Stock Value: 2-Period Example

Using a Financial Calculator:

INPUTS 1 20 0 2
N I/YR PV PMT FV
OUTPUT -1.67

INPUTS 2 20 0 16.80
N I/YR PV PMT FV
OUTPUT -11.67

Intrinsic Value 𝑃! = $1.67 + $11.67 = $𝟏𝟑. 𝟑𝟑

13
 Stock Value: 2-Period Example
Using a Financial Calculator – Method 2

Using the Cashflow function

1. <CF> (Initiate Cashflow function)
2. <0> <Enter> <↓> (𝐶𝐹! = $0)
3. <2> <Enter> <↓> (𝐶𝐹" = $2)
4. <1> <Enter> <↓> (No. of consecutive $2 = 1)
5. <16.80> <Enter> <↓> (𝐶𝐹# = $16.80)
6. <1> <Enter> <↓> (No. of consecutive $16.80 = 1)
7. <NPV> (Net Present Value)
8. <20> <Enter> <↓> (I/YR = 20%)
9. <CPT> (Should see NPV = $13.33 on screen)
Important: Remember to clear the memory!
1. <CF> (Initiate Cashflow function)
2. <2nd> <CE/C> (Clear the Cashflow function) 14
 Stock Value: 2-Period Example
Using Excel:

1 2

Intrinsic Value 𝑃! = $𝟏𝟑. 𝟑𝟑

15
 Stock Value: 3-Period Example

• Finally, what if you decide to hold the same stock for three
periods?
• In addition to the dividends at the end of years 1 and 2, you
expect to receive a dividend of $2.205 at the end of year 3
and a stock price of $15.435 at the end of year 3. Now, what
is the intrinsic value of the stock?

16
 Stock Value: 3-Period Example
Using a Time-Line:
0 1 2 3
20%

D1=$2 D2=$2.10 D3=$2.205

+
P3=$15.435
CF1=$2 CF2= $2.10 CF3= $17.64
Find PV

𝐶𝐹" 𝐶𝐹# 𝐶𝐹$

Intrinsic Value 𝑃! = " + # +
(1 + 𝑟) (1 + 𝑟) (1 + 𝑟)$
$2 $2.10 $17.64
= " + # + $ = $𝟏𝟑. 𝟑𝟑
(1 + 20%) (1 + 20%) (1 + 20%)
17
 Stock Value: 3-Period Example
Using a Financial Calculator:

INPUTS 1 20 0 2
N I/YR PV PMT FV
OUTPUT -1.67

INPUTS 2 20 0 2.10
N I/YR PV PMT FV
OUTPUT -1.46

INPUTS 3 20 0 17.64
N I/YR PV PMT FV
OUTPUT -10.21

Intrinsic Value 𝑃! = $1.67 + $1.46 + $10.21 = $𝟏𝟑. 𝟑𝟑

18
 Stock Value: 3-Period Example
Using a Financial Calculator – Method 2

Using the Cashflow function

1. <CF> (Initiate Cashflow function)
2. <0> <Enter> <↓> (𝐶𝐹! = $0)
3. <2> <Enter> <↓> (𝐶𝐹" = $2)
4. <1> <Enter> <↓> (No. of consecutive $2 = 1)
5. <2.10> <Enter> <↓> (𝐶𝐹# = $2.10)
6. <1> <Enter> <↓> (No. of consecutive $2.10 = 1)
7. <17.64> <Enter> <↓> (𝐶𝐹$ = $17.64)
8. <1> <Enter> <↓> (No. of consecutive $17.64 = 1)
9. <NPV> (Net Present Value)
10. <20> <Enter> <↓> (I/YR = 20%)
11. <CPT> (Should see NPV = $13.33 on screen)
Important: Remember to clear the memory!
19
 Stock Value: 3-Period Example
Using Excel:

1 2

Intrinsic Value 𝑃! = $𝟏𝟑. 𝟑𝟑

20
 Stock Value: Developing The Model

• Let’s say you continue to delay selling the stock

• In this case, you would find that the price of the stock is
simply the Present Value of all expected future dividends
𝐷%&" 𝐷%&# 𝐷%&$ 𝐷(
𝑃G% = " + # + $ + ⋯+
(1 + 𝑟' ) (1 + 𝑟' ) (1 + 𝑟' ) (1 + 𝑟' )(

• But how can we estimate all future dividend payments?

There are some simplifying cases that make this estimation
easier.

21
Dividend Growth Model (DGM)
Estimating Dividends: Simplifying Cases
1. Constant Dividend (Zero-Growth Dividend)
– The firm will pay a constant dividend forever
– Growth rate of dividend, g, is 0%.

2. Constant Dividend Growth (Stable Growth)

– The firm will increase the dividend by a constant rate
every period
– Growth rate of dividend is g forever.

3. Supernormal Growth (Non-constant Growth)

– Dividend growth is not consistent initially, but settles
down to constant growth rate eventually

23
Scenario 1: Firm Pays Constant Dividends
If constant dividends are expected at regular intervals forever,
then this is like preferred stock and is valued as a _________:

Recall the general Formula for Price of Stock

formula for perpetuity: Paying Constant Dividend:

𝐶𝐹1 𝐷1
𝑃𝑉 = 𝑃+ =
𝑟 𝑟,

Required return estimated using CAPM

24
 Constant Dividend Example
Suppose a stock is expected to pay a $2.50 dividend
every year and the required return is 10%.
What is the price of the stock?

$2.50
𝑃+ = = $𝟐𝟓. 𝟎𝟎
10%

25
 Features of Preferred Stock
• Preferred stock has precedence over common stock in the
payment of dividends and in liquidation. Its dividend is usually
fixed and the stock is often without voting rights.

• Preferred Dividends
– Stated dividend must be paid before dividends can be paid to
common stockholders
– Not a liability of the firm and can be deferred indefinitely
– Most are cumulative – any missed preferred dividends have
to be paid before common dividends can be paid. However,
unpaid preferred dividends are not debts of the firm.

26
 Return of Preferred Stock
If preferred stock with an annual dividend of $5 sells for $50,
what is the preferred stock’s required return?

𝐷1 𝐷1
𝑃! = 𝑟" =
𝑟" 𝑃!

$5
=
$50
= 10%

27
 Scenario 2: Constant Dividend Growth

The formula for the price of the stock in this case is:

𝐷-
𝑃+ =
𝑟, − 𝑔

where
1. 𝑔 is the constant growth rate of dividends
2. 𝐷" is the dividend received at the end of year 1

* The formula is the same as that of a growing perpetuity.

The derivation of this formula can be found in the Appendix of Lecture 3.
28
 Scenario 2: Constant Dividend Growth
• The stable model is best suited for firms experiencing long-term
stable growth.
• Generally, stable firms are assumed to grow at the rate equal to
the long-term nominal growth rate of the economy (real growth in
GDP + inflation).

• Also, 𝐷"
𝑃! = requires 𝑟' > 𝑔
𝑟' − 𝑔
If 𝑟$ ≤ 𝑔, stock price is infinite, which makes no economic sense.
Hence, we cannot use this model unless:
1. 𝑟$ > 𝑔, and
2. 𝑔 is expected to be constant forever.
29
 Constant Dividend Growth – Example
Ninja Co. just paid a dividend of $2. If dividends are expected to
grow at 5% per year forever and the required return is 20%, what
is the price of Ninja Co. stock?

$2 × (1.05)
𝑃L = = $𝟏𝟒. 𝟎𝟎
20% − 5%

Note:
The use of the words “just paid” means the stockholder has already
received this cash flow. Hence it is no longer considered a future
expected dividend and will not be included in the pricing of the stock.

30
Comprehensive Example Incorporating CAPM
Let’s say we have the following information:
• Stock beta, 𝛽 = 1.2,
• Risk-free rate, 𝑟) = 7%,
• Market return, 𝑟* = 12%,
• Dividend just paid, 𝐷! = $2,
• Constant growth rate of dividends, g = 6%,

1. What is the required rate of return on the firm’s stock?

2. What’s the price of the stock?

31
Comprehensive Example Incorporating CAPM

1. Required return of the stock:

𝑟" = 𝑟# + 𝛽 𝑟$ − 𝑟# = 7% + 1.2 12% − 7% = 𝟏𝟑%

2. Price of the stock:

$2 × (1.06) $2.12
𝑃! = = = $𝟑𝟎. 𝟐𝟗
13% − 6% 7%

32
Comprehensive Example Incorporating CAPM
What would the stock’s price be one year from now, 𝑃"?
0 1 2 3
13% ...
D1 D2

P0 P1

D1 would have just been paid, so expected dividends will be

D2, D3, D4 and so on. Thus,
𝐷& $2.12(1.06)
𝑃% = = = $𝟑𝟐. 𝟏𝟎
𝑟" − 𝑔 13% − 6%
33
Comprehensive Example Incorporating CAPM
What is the expected dividend yield, capital gains yield, and
total return for the first year

𝐷% $2.12
Dividend Yield = = = 𝟕%
𝑃! $30.29

𝑃% − 𝑃! $32.10 − $30.29
Capital Gains Yield = = = 𝟔%
𝑃! $30.29

Total Return = 7% + 6% = 𝟏𝟑%

34
Comprehensive Example Incorporating CAPM
If you rearrange the model to make 𝑟$ the subject:

𝐷% 𝐷% $2.12
𝑃! = 𝑟" = +𝑔 = + 6%
𝑟" − 𝑔 𝑃! $30.29
= 7% + 6% = 𝟏𝟑%
The expected return of the stock is 13%.

• Recall that we had earlier found the required return of the

stock using CAPM to also be 13%.
• In ____________, the required return of the stock – as found
by CAPM is equal to the expected return of the stock – as
found by adding its dividend yield and capital gains yield.
35
Scenario 3: Non-Constant Growth Example
Suppose a firm is expected to increase dividends by 20% in
the first year and by 15% in the second year.
After that, dividends will increase at a constant rate of 5%
per year forever.
If the last-paid dividend was $1 and the required return is
10%, what is the price of the stock?

36
Scenario 3: Non-Constant Growth Example

• Remember that we must find the PV of all expected future

dividends.
• Can no longer use constant growth model since dividends
are not growing constantly forever.
• However, dividend growth does becomes constant after
the second year, so we can incorporate the constant
growth formula at that time.
• To solve, let’s draw a timeline – it helps to visualize the
cash flows!

37
Scenario 3: Non-Constant Growth Example
𝑔 = 5%
Using a Time-Line:
0 1 2 3
10%

D0=$1 D1=$1(1.2) D2=$1.20(1.15) D3=$1.38(1.05)

= $1.20 = $1.38 =$1.449
+
Can apply the
𝑃% is also called 𝐷$ $1.449 constant
𝑷𝟐 = =
Terminal Value, 𝑇𝑉% 𝑟& − 𝑔 10% − 5% dividend growth
model here
= $𝟐𝟖. 𝟗𝟖
Find PV
CF1 = $1.20 CF2 = $30.36

$1.20 $30.36 Note: We do not add 𝐷'

𝑃! = + # = $𝟐𝟔. 𝟏𝟖
1.1 1.1 into the calculation for 𝑃' .
38
 Why Do Stock Prices Change?
𝐷- 𝐷+ (1 + 𝑔)
𝑃+ = =
𝑟, − 𝑔 𝑟, − 𝑔

1. 𝑟' could change:

𝑟' = 𝑟) + 𝛽(𝑟* − 𝑟) )
𝑟) ≈ 𝑟 ∗ + inVlation premium for expected inVlation
real risk-free interest rate

2. 𝑔 could change due to a macroeconomic or firm-specific

situation.

39
Example: Singapore Shares Fall On Week
After Fed Move

40
Example: Tokyo Zoo Panda Gives Birth,
Sending Shares in Retailers Surging
•Ueno Zoo panda Shin Shin gives birth to at least one cub
•Shares in nearby Chinese eatery Totenko surge as much as 38%

41
Example: Facebook parent Meta
sheds US$200 billion in stock plummet

– Straits Times, 4th Feb 2022 42

Corporate Valuation Model
 Corporate Valuation Model
also known as the Free Cash Flow (FCF) method

• How do we value firms that do not pay dividends? Obviously,

we need a different method from the DGM for these firms.
• The Corporate Valuation Model suggests that the current
value of the entire firm equals the PV of the firm’s FCFs.
• Recall that Cash Flow from Assets (CFFA) (or Free Cash
Flow) is the firm’s after-tax operating income less the net
capital investment in fixed assets and investment in
operating working capital:

CFFA = OCF – NCS – Changes in NOWC

44
 Corporate Value Model
• Previously, we found a firm’s past CFFA when we considered
its past year’s Income Statement and Balance Sheet. Now we
need to find projected CFFAs from projected Balance Sheets
and Income Statements.

• Projected CFFAs are the cash flows expected to be generated

by a firm’s operating assets for a given period, after taking into
account investment needed in fixed assets and operating
working capital. Thus, this is cash available to the providers of
the capital.

• To find the PV of these projected CFFAs, the appropriate

discount rate to use is the Weighted Average Cost of Capital
(WACC)* since the firm would have a mix of equity and debt.
* We will discuss the derivation of WACC in more detail in Lecture 9 45
 Applying the Corporate Value Model:
The Steps

1 Find the market value of the firm, by finding the PV of

the firm’s future CFFAs.

2 From the market value of the firm, subtract market

value of the firm’s debt and preferred stock to get the
firm’s market value of common stock.

3 Divide this market value of common stock by the

number of common shares outstanding to get intrinsic
stock price (value) per common share.

46
 Example: Corporate Value Model
You have the following information about a firm:
• Projected CFFAs (in $millions):
– Year 1: –5
– Year 2: 10
– Year 3: 20
• After year 3, the firm expects CFFA to grow at a long-run constant
growth rate gCFFA of 6%.
• The firm has $40 million of debt.
• The firm has 10 million common shares outstanding.
• The firm’s Weighted Average Cost of Capital (WACC) is 10%.
What is the intrinsic value of this firm’s common stock?
47
 Example: Corporate Value Model
𝑔 = 6%

0 1 2 3 4 ...
10%

𝐶𝐹𝐹𝐴" 𝐶𝐹𝐹𝐴# 𝐶𝐹𝐹𝐴$ 𝐶𝐹𝐹𝐴)

= −𝟓 = 𝟏𝟎 = 𝟐𝟎 = 20 1 + 6%
+ = 𝟐𝟏. 𝟐𝟎
𝐶𝐹𝐹𝐴) 21.20 Can apply
𝑇𝑉$ = = the constant
𝑤𝑎𝑐𝑐 − 𝑔 10% − 6%
growth
= 𝟓𝟑𝟎 model here
Find PV
CF1 = –5 CF2 = 10 CF3 = 550

−5 10 550
1 Market Value of Firm = + # + $ = $𝟒𝟏𝟔. 𝟗𝟒𝐦𝐢𝐥
1.1 1.1 1.1
48
 Example: Corporate Value Model

2 MV of Equity = MV of Firm − MV of Debt

= $416.94mil − $40mil = $376.94mil

3 Intrinsic Value of Common Stock

MV of Equity
=
Number of common shares outstanding

$376.94mil
= = $𝟑𝟕. 𝟔𝟗
10mil

49
 Overall Summary
• Intrinsic Value ≠ Market Value
• The intrinsic value of a stock is the PV of future expected dividends
(Dividend Growth Model):
𝐷&'( 𝐷&'% 𝐷&'* 𝐷+
𝑃H& = + + + ⋯+
(1 + 𝑟) )( (1 + 𝑟) )% (1 + 𝑟) )* (1 + 𝑟) )+

• The expected return of stock is the sum of its dividend yield and its
capital gains yield. 𝑟) = 𝐷( + 𝑔
𝑃,

• The market value of a firm is the PV of the projected CFFAs

(Corporate Valuation Model):
𝐶𝐹𝐹𝐴( 𝐶𝐹𝐹𝐴% 𝐶𝐹𝐹𝐴* 𝐶𝐹𝐹𝐴+
MV-./0 = + + + ⋯ +
(1 + 𝑤𝑎𝑐𝑐)( (1 + 𝑤𝑎𝑐𝑐)% (1 + 𝑤𝑎𝑐𝑐)* (1 + 𝑤𝑎𝑐𝑐)+
• The intrinsic value of the stock is then found by:
MV-./0 − MV1234
V, =
Number of shares outstanding 50
 Relative Valuation
(also known as Multiples Method)

NOT EXAMINABLE
 Valuation with Multiples
• The Multiples Method of valuation can be used to obtain a quick
idea of value when the determinants of value (CFFA, WACC, etc.)
are not so clear or readily available.

• In this method, the observed prices of assets similar to the asset of

interest (traded securities and/or similar deals) are appropriately
scaled and then used to estimate the value of the asset concerned
(often a non-traded security and/or incomplete deal).
• This method is premised on the belief that firms in the peer group
should have similar market ratios.
• The multiples method can serve as a rough “market” check on
values obtained using the Dividend Growth Model or the Corporate
Valuation Model.
52
 Valuation with Multiples: The Steps

1 Obtain a group of publicly-listed peers

2 Decide on a benchmark market ratio to use, e.g. P/E, P/S,

EV/EBITDA, etc.
3 Find the average or median benchmark ratio for the peer
group

4 Multiply with the firm’s financial data to obtain estimate of

market price

53
 Valuation with Multiples: Example
Let’s say we want to 1 2
estimate the value
Firm P/E ratio
of General Motors
Ford 9.68
Company (GMC)
stock Daimler 7.37
Volkswagen 8.49
3 Average 8.51

4 GMC Earnings 2020 = 10.94B

GMC MV of Equity 2020 = 8.51 × 10.94B = 93.10B
GMC No. of Shares Outstanding 2020 = 1.4B
93.10B
GMC Stock Intrinsic Value = = $𝟔𝟔. 𝟓𝟎
1.4B 54
 Valuation with Multiples: Example

Our estimate of $66.50 is very close to the market price of $66.94.

55
 Valuation with Multiples: Some Issues

• Usually heavy reliance on accounting data (especially P/E

ratio), hence subjected to differences in accounting
treatment for different firms.
• No reflection of unique aspects of firms in industry, e.g.,
marketing strategies, technological differences, age of
assets, etc.
• Often challenging to find comparable peer group of firms.
• The range of ratios in the peer group could be very large
making the average of the ratio not very meaningful.

56
How Firms Issue Securities

NOT EXAMINABLE
 How Firms Issue Securities
A Firm issues Equity
(Mainly to raise funds)

Offered to Offered to Offered to

general public group of existing
qualified shareholders
purchasers

General Direct
SPAC Private Rights
Cash Offer Listing, (e.g. Grab) Placement Issue
(IPO or SEO) (e.g. Spotify)

IPO: Initial Public Offering – First equity issue to the public

SEO: Seasoned Equity Offering – New equity issue by firm that has previously
issued securities to the public
58
 General Cash Offerings
• Securities are offered to the general public

• Usually involves underwriters (mostly investment banks):

1. Formulate the issue method
2. Price the new securities
3. Sell the new securities

• Types of Underwriting
– Firm Commitment: issuer sells entire issue to the underwriter, who
then tries to resell it.
– Best Efforts: underwriter uses “best efforts” to sell at agreed-upon
offering price.
– Dutch Auction: Underwriter conducts an auction in which investors
bid for shares.
59
 Direct Listing
• Securities are offered to the general public

• Instead of raising new outside capital like an IPO, employees and

investors sell their existing stocks to the public.

• No underwriters are used, hence it is a much lower cost strategy than

an IPO (~0.5–1.5% financial advisory fee vs ~6–7% underwriting fee for
investment banks).

• Pricing on first day depends solely on demand and supply, hence could
be more volatile than an IPO.

• Does not have the “lock-up” period that applies to IPOs. In traditional
IPOs, though not always required, companies have lock-up periods in
which existing shareholders are not allowed to sell their shares in the
public market.

60
SPAC (Special Purpose Acquisition Company)
• Securities are offered to the general public

• Somewhat similar to IPO, but like a short-cut.

• Time- and cost-efficient for a company that’s looking to go public.

• A SPAC is a shell company with money (but no operations), looking to

merge with a “real” company who needs funds to expand – the target
company.

• The SPAC raises capital via its own IPO, has about 18–24 months to
identify and negotiate with a target company. Once details are agreed
upon (including shareholders approval), they merge within about 3–5
months. If no target company is found, the SPAC liquidates and the
IPO proceeds are returned to the shareholders.

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 Private Placements

• Tailored to meet specific needs

• Does not have to register with a government agency
• Flexible, discreet, and speedy method of raising funds
• Drawback – absence of organized trading in privately
held securities

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 Rights Offering
• Issue of new stock to existing shareholders on a privileged-
subscription basis.
• Firm distributes to its shareholders rights to subscribe for
additional shares at a specified price.
• Shareholders can do one of the following:
1. Exercise their rights and subscribe for the shares.
2. Sell the rights to interested investors if they do not want to
buy new shares.
3. Do nothing and let the right expire.

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