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To execute a rights offering, the financial management of National Power will have to answer the following questions:

1. What should the price per share be for the new stock?

2. How many shares will have to be sold?

3. How many shares will each shareholder be allowed to buy?

Also, management will probably want to ask:

4. What is likely to be the effect of the rights offering on the per-share value of the existing stock?

It turns out that the answers to these questions are highly interrelated. We will get to them in just a moment.

The early stages of a rights offering are the same as those for the general cash offer. The difference between a rights offering and a general cash offer lies in how the shares are sold. In a rights offer, National Power's existing shareholders are informed that they own one right for each share of stock they own. National Power will then specify how many rights a shareholder needs to buy one additional share at a specified price.

To take advantage of the rights offering, shareholders have to exercise the rights by filling out a subscription form and sending it, along with payment, to the firm's subscription agent (the subscription agent is usually a bank). Shareholders of National Power will actually have several choices: (1) exercise their rights and subscribe for some or all of the entitled shares, (2) order some or all of the rights sold, or (3) do nothing and let the rights expire. As we will discuss, this third course of action is inadvisable.

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