Answer:
Larry must have signed a <u>PROXY AGREEMENT</u> that gives the management group control over his shares.
A proxy agreement is generally used for stockholders voting procedures, they basically grant another person the right to vote on behalf of another stockholder.
Larry's current investment in the company is <u>$86,000</u>.
= 2,000 stocks x $43 = $86,000
If the company issues new shares and Larry makes no additional purchase, Larry's investment will be worth <u>$82,560</u>.
company's new market value = (20,000 x $43) + (5,000 x $34.40) = $1,032,000
new stock price = $1,032,000 / 25,000 stocks = $41.28
= $41.28 x 2,000 = $82,560
This scenario is an example of <u>STOCK DILUTION</u>.
The stock price will lower because the increase in the company's value is less than proportional to the increase in the number of stocks.
Larry could be protected if the firm's corporate charter includes a <u>PREEMPTIVE</u> provision.
Preemptive rights give current stockholders the right to purchase more stocks (in case the company issues more stocks) before any outside investors.
If Larry exercises the provisions in the corporate charter to protect his stake, his investment value in the firm will become <u>$103,200</u>.
= [(5,000 / 10) x $34.40] + $86,000 = $17,200 + $86,000 = $103,200
