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 $48.00 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 $38.40 per share. Larry worries about the value of his investment. . If the company issues new shares and Larry makes no Larry's current investment in the company is 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

Answer 1

Answer:

$ 96,000

Explanation:

As Larry holds 2,000 shares in 20,000 shares company, his stake is 10% in the company. Total value of companys ahres = 20000* 48 = $ 960,000

Larry's investment value is 10% * 960,000 = $ 96,000

If the company issues new shares, total number of shares = 25,000

Larrys share = 2000/25,000 = 8%

Total Market value of company = 25,000* 38.40 = 960,000

Larry investment now= 8% * 960,000 = $76,800

The scenario is an example of dilution of Larry's stake. Larry could be protected if the corporate charter includes an anti dilution provision or ratchet clause in common parlance.

If Larry exercises the anti dilution provision , his investment value will remain 10% of the total value

So 10% * 960,000 = $ 96,000