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Larry Nelson holds 1,000 shares of General Electric (GE) common stock. As a stockholder, he has...

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

True or False: Larry can vote in person at the company’s annual meeting, through the mail, or by transferring the right to vote to another person by means of proxy.

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.

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   .

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   .

Solutions

Expert Solution

1. The given statement is TRUE.  Larry can vote in person at the company’s annual meeting, through the mail, or by transferring the right to vote to another person by means of proxy.

2. Larry’s current investment in the company is $90000 (Shares held * share price = 2000 * 45) . If the company issues new shares and Larry makes no additional purchase, Larry’s investment will be worth $86400 (43.20 * 2000)

Share price after new shares issue = (Current value + new new issue value) / shares O/s after issue = (20000 * 45 + 5000 * 36) / 25000 = $43.20

3. This scenario is an example of Dilution where Ownership in the company reduces even if stocks is same. Larry could be protected if the firm’s corporate charter includes a Preemptive provision which gives right to shareholder to maintain ownership % in the company.

If Larry exercises the provisions in the corporate charter to protect his stake, his investment value in the firm will become $108000

Current value + Ownership in new issue = $90000 + 5000 * 36.00 * 10% = $108000

*Please comment if you face any difficulty and please don't forget to provide positive rating*

jeff jeffy answered 1 year ago
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