Question

1. Rights and privileges of common stockholders

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 invest in another company that is selling class A stocks 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. The company’s stock currently is valued at $43.00 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 $34.40 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

Answer 1

SOLUTION:

INDIVIDUALS HOLDS 1000 SHARES OF COMPANY GE STOCK . AND AS A STOCK HOLDER, HE HAS RIGHT TO BE INVOLVED IN THE ELECTION FOR DIRECTORS WHO ARE HELD RESPONSIBLE FOR MANAGING THE COMPANY.

INDIVIDUALS L CAN INVEST IN ANOTHER FIRM THAT WILL SELL CLASS A STOCKS TO PUBLIC AND CLASS B STOCK WILL BE RETAINED BY COMPANY INSIDER WHICH WILL HELP THE FOUNDERS MAINTAIN CONTROL IN THE COMPANY.

THE CLASSIFICATION IN COMMON STOCK IS MADE TO ATTRACT DIFFERENT CLASS OF INVESTORS. IN GENERAL, CLASS-A SHARES ARE SUPERIOR THAN CLASS-B SHARES, BUT, SOMETIMES CLASS-B SHARES COULD HAVE MORE VOTING POWERS, IF IT WILL BE RETAINED BY THE FOUNDERS.

THE DIFFERENTIATION IS MADE BY THE OWNERS/FOUNDERS TO RETAIN MORE CONTROLLING POWER, WHICH DIFFER INDUSTRY-TO-INDUSTRY AND WITH THE STAGE OF COMPANY LIFE CYCLE. AT THE SAME TIME CLASS-A SHARES ARE MORE POPULAR AMONG THE INVESTORS. THUS, BY KEEPING THE SAME VOTING POWER IN BOTH TYPE OF SHARES FOUNDERS WOULD BE ABLE TO ATTRACT MORE FUNDS.

HENCE, THE GIVEN STATEMENT IS TRUE

INDIVIDUAL L HOLDS 2000 SHARES OF COMMON STOCK OF A FIRM THAT HAS 20000 SHARES OUTSTANDING. THE CURRENT STOCK PRICE IS $ 43.00 PER SHARE . THE FIRM WANTS TO RAISE NEW CAPITAL AND IS LOOKING TO ISSUE 5000 NEW SHARES AT A PRICE OF $34.40 PER SHARE

CALCULATE THE CURRENT INVESTMENT OF INDIVIDUAL L IN THE FIRM AS FOLLOWS:

CURRENT INVESTMENT = NUMBER OF SHARES * CURRENT STOCK PRICE

=2000 * 43

=$86000

HENCE, THE ANSWER FOR FIRST BLANK IS $86000

CALCULATE THE INVESTMENT WORTH OF INDIVIDUAL L IF THE FIRM ISSUES NEW SHARES BUT L DOES NOT MAKE ANY ADDITIONAL PURCHASE OF SHARES AS FOLLOWS:

INVESTMENT WORTH= [ (NUMBER OF SHARES OUTSTANDING * CURRENT STOCK PRICE) + (NEW NUMBER OF SHARES OUTSTANDING * STOCK PRICE FOR NEW ISSUE) ] / TOTAL SHARES OUTSTANDING * SHARES HOLDING OF L

=[ (20000 * $ 43) + (5000 * 34.40) / 20000+5000 * 2000

=($ 860000 + 172000) / 25000 * 2000

=$41.28 * 2000

=$82560

HENCE, THE ANSWER FOR SECOND BLANK IS $82560 .

DILUTION OCCURS WHEN A FIRM ISSUE MORE SHARES AND THE SHARES OUTSTANDING INCREASES AND THE EXISTING STOCKHOLDER WILL HAVE LESSER OR DILUTED PERCENTAGE OF THE SHARES OF THE FIRM . THE SCENARIO STATED ABOVE IS AN EXAMPLE OF DILUTION.

HENCE, THE ANSWER FOR THIRD BLANK IS DILUTION.

THE PREEMPTIVE RIGHT ALLOWS SELECTED SHAREHOLDERS OF A FIRM THE RIGHT TO PURCHASE PROPORTINAL SHARES IN ANY FUTURE COMMON STOCK ISSUE OF THE FIRM. THESE STOCKHOLDERS ARE ALLOWED TO PURCHASE BEFORE THE SHARES ARE OFFERED TO GENERAL PUBLIC . SO, IF THIS PROVISION IS THERE THEN INDIVIDUAL L CAN BE PROTECTED.

HENCE THE ANSWER FOR FOURTH BLANK IS PREEMPTIVE RIGHT

IN CASE, INDIVIDUAL L EXERCISES THE PROVISION, HE WILL HAVE 10% (2000/20000) OF STAKE FROM THE NEW SHARE ISSUED. CALCULATE THE INVESTMENT VALUE OF HIM IN THE FIRM AS FOLLOWS :

INVESTMENT WORTH = (NUMBER OF SHARES *CURRENT STOCK PRICE) + (NUMBER SHARES FROM NEW ISSUE * STOCK PRICE)

= (2000*$43) + ($ 5000* 10% * 34.40)

= $ 86000+$17200

= $ 103200

HENCE , THE ANSWER FOR FIFTH BLANK IS $ 103200.

THANK YOU PLEASE VOTEUP!!!!!!