Question

The average number of outstanding common shares for Pei Ding Inc. was around 10.5 million as of December 31, 2020. If you buy 20,000 common shares of Pei Ding Inc., what is your fractional ownership of Pei Ding Inc.? If the company decided to buy back its own shares (e.g. 500,000 shares), does your fractional ownership increase or decrease?

A. 0.25%; decrease

B. 0.19%; decrease

C. 0.19%; increase

D. 0.25%; increase

Answer 1

Buying 20,000 shares out of 10.5 million outstanding shares of Pei Ding Inc. results in 0.19% ownership. If the company buys back shares, the fractional ownership of an individual shareholder increases because the total number of shares decreases while the shareholder's number of shares remains the same. The correct answer is C. 0.19%; increase.

Step-by-step explanation:

If you buy 20,000 common shares of Pei Ding Inc., when the average number of outstanding common shares is 10.5 million, your fractional ownership would be calculated as follows:

20,000 / 10,500,000 = 0.00190476, which is approximately 0.19%.

If the company decides to buy back its own shares, say 500,000 shares, the total number of outstanding shares would decrease to 10 million (10,500,000 - 500,000). Consequently, your percentage ownership would increase, since you now hold 20,000 out of 10 million shares. The new fractional ownership would be:

20,000 / 10,000,000 = 0.002, which is exactly 0.2%.

Therefore, your fractional ownership of Pei Ding Inc. is 0.19% and if the company buys back shares, your fractional ownership will increase.

The correct answer is C. 0.19%; increase.