Ouch!

E*TRADE (NASDAQ:ETFC) priced its secondary offering this morning at $1.10 a share. Unfortunately, it's a low price. E*TRADE is firing up the printing press to crank out 435 million new shares -- as many as 500 million if underwriters need more to cover overallotments -- at that price. It's a far cry from last week's close of $1.97 a share.

It doesn't end there.

Pricing the secondary offering establishes dirt cheap exchange prices for an even larger debt swap. E*TRADE will replace interest-bearing debt for zero-coupon convertible debentures that mature in 10 years. The proposed exchange offer rates for the two debt classes will be a mere $1.034 and $1.551 per share.

Is this dilutive? You bet. Could the timing have been better? Definitely. Did the stock open lower this morning? Absolutely.

But is E*TRADE doing the right thing? You know it.

Under the weight of exposure to billions in risk-weighted assets and a dangerously low Tier 1 capital ratio, the company needed to raise money. Hacking away at its interest-bearing debt is a bonus.

The silver linings -- like its largest investor and creditor committing to raising capital and cutting the interest expense -- are important. Citadel is getting great terms, but it's giving E*TRADE the breathing room it needs while drawing Citadel in even closer.

Dilution isn't fun. Analysts see E*TRADE joining profitable cronies like Charles Schwab (NASDAQ:SCHW), optionsXpress (NASDAQ:OXPS), and TD AMERITRADE (NASDAQ:AMTD) in the black by 2011, but the burden of as many as 500 million new shares and what will likely be in-the-money convertible debt is going to divide the eventual profits into thinner per-share slices.

Investors can grimace, but they may as well swallow the medicine. The future would have looked pretty bleak if the company didn't take the steps to raise capital, and that's assuming that tightening capital requirements don't force E*TRADE to return to the well for yet another secondary offering.

E*TRADE is doing a lot of things right these days. The E*TRADE Baby is probably the most memorable ad campaign of any discount broker in years. The company is on the cutting edge of trading technology, with mobile apps through smartphone leaders Apple (NASDAQ:AAPL) and Research In Motion (NASDAQ:RIMM).

Ripping the Band-Aid off stings, but it's better than going about it slowly. Let the healing begin.

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Longtime Fool contributor Rick Munarriz believes in self-service gasoline pumps and self-service stock brokerages. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.