Question

Larry also holds 2,000 shares of common stock in a company that only has 20,000 shares outstanding. The company’s stock currently is valued at $45.00 per share. The company needs to raise new capital to invest in production. The company is looking to issue 5,000 new shares at a price of $36.00 per share. Larry worries about the value of his investment.

a. Larry's current investment in the company is __________If the company issues new shares and Larry makes no additional purchase, Larry's investment will be worth _____________
b. This scenario is an example of __________ . Larry could be protected if the firm's corporate charter includes a provision.
c. If Larry exercises the provisions in the corporate charter to protect his stake, his investment value in the firm will become ___________

Answer 1

Answer and Explanation:

a. The current investment is

= 2,000 × $45

= $90,000

The investment should be worth of

= (20000 × 45)+ (5000 × 36)

= ($900,000 + $180,000)

= $1,080,000

Now price per share is

= $1.080.000 ÷ 25,000

= 43.2

so, new value of larry shares is

= 43.2 × 2000

= $86,400

b. Dilution and preemptive right

c The investment value should be

= 90,000 + 500 × 36

= 90,000 + 18,000

= 108,000