Question

the disadvantage of a rights offering is: multiple choice current shareholders are protected against dilution. the firm has a built-in market of knowledgeable investors. distribution costs are lower than a public offering. shareholders who do not exercise or sell rights will have their ownership diluted.

Answer 1

The main disadvantage of a rights offering is ownership dilution for shareholders who do not exercise or sell their rights, as it leads to a smaller percentage of ownership and potential loss of influence.

Step-by-step explanation:

The disadvantage of a rights offering is that shareholders who do not exercise or sell rights will have their ownership diluted. When a company issues a rights offering, it gives existing shareholders the right to purchase additional shares at a discounted price.

If shareholders choose not to exercise this right and do not sell their rights, new shares will be issued to others, leading to a reduction in the relative ownership stake of the non-participating shareholders. This can result in a loss of influence and a decrease in the value of their investment.