Larry Nelson holds 1,000 shares of General Electric common stock. As a shareholder, he has the...

Larry Nelson holds 1,000 shares of General Electric common stock. As a shareholder, he has the right to be involved in the election of its directors. These directors are responsible for managing the company and achieving the company’s objectives.

True or False: Larry can invest in another company that is selling class A shares to the public, and class B shares will be retained by company insiders. This will help the founders maintain control in the company.

True

False

Larry also holds 2,000 shares of common stock in a company that only has 20,000 shares outstanding. Currently, the company’s stock is valued at $47.00 per share. The company needs to raise new capital to invest in its future production activities. The company is anticipating issuing 5,000 new shares at a price of $37.60 per share. Larry worries about the value of his investment.

Larry’s current investment in the company is worth $ __________________

. If the company issues its new shares and Larry makes no additional investments in the company, then his investment will be worth $ _______________

.

This scenario is an example of _____________ . Larry could be protected if the firm’s corporate charter includes a _____________ provision.

If Larry exercises the provisions in the corporate charter to protect his stake, his investment value in the firm will become $ _________________

Expert Solution

True .

Larry can invest in another company that is selling class A shares to the public, and class B shares will be retained by company insiders. This will help the founders maintain control in the company. A preemptive right is a provision that gives shareholders the right to buy new shares in any new share issuance in proportion to their existing stake in company.

Larry's current investment in the company is $ 82000 ( 2000 * $ 41). If the company issues new shares and Larry makes no additional purchase , Larry's investment will be worth $ 78720 [ ( 20000 * 41 + 5000 * 32.80 )/25000 = $ 39.36 * 2000 ]

This scenario is an example of dilution. Larry could be protected if the firm's corporate charter includes a Preemptive Right provision.

If Larry exercises the provisions in the corporate charter to protect his stake, his investment value in the firm will become $ 98400 (2000 * 41 + 500 * 32.80 )

ekkarill92 answered 1 year ago

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