Question

Eddie holds 25% of Bower Company's common shares. Bower Company issues 10,000 additional new shares. Which of the following is correct?
a) Under the preemptive right, Eddie will have the first opportunity to buy 10,000 shares
b) Under the preemptive right, Eddie will have the first opportunity to buy 2,500 shares
c) Under the right to share pro rata, Eddie will have the first opportunity to buy 10,000 shares
d) Under the right to share pro rata, Eddie will have the first opportunity to buy 2,500 shares
e) None of these choices are correct

Answer 1

Answer:

b) Under the preemptive right, Eddie will have the first opportunity to buy 2,500 shares

The preemptive right, also known as the right of first refusal, gives existing shareholders the opportunity to purchase additional shares before they are offered to the public or to new investors.

Since Eddie holds 25% of Bower Company's common shares, he would have the right to maintain his proportional ownership stake in the company by purchasing additional shares.

With the issuance of 10,000 new shares, Eddie's preemptive right would entitle him to purchase 25% of those new shares, which is 25% of 10,000, or 2,500 shares. Therefore, option b is correct.