Explain why firms generally sell their equity through rights

Explain why firms generally sell their equity through rights issues.

Solution

Rights issue is preferred for the following reasons:

1) The cost of a rights issue is very less. The expenses associated with a public issue are avoided.

2) There is no dilution of holdings of the existing shareholders as the existing shareholders are offered new shares in proportion to their existing holdings. They are able to retain their control, if any, of the company\'s affairs.

3) Rights issue has less compliance requirements.