Question

Larry 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 $41.00 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 $32.80 per share. Larry worries about the value of his investment.

Answer 1

Answer:

We have to find the value of Larry's investement before and after the issue of new shares, to see if Larry's worries are justified.

The current value of Larry's investment is:

2,000 x $41.00 = $82,000

To find the value of Larry's investment if the new shares are issued, we use the following formula:

Investment = ¨[[(Oustanding shares x price per share) + (New issue of shares x price per share)]/ Outsanding shares + new issue] x No. of shares held

Investment = [[(20,000 x 41.00) + (5,000 x 32.80)] / 20,000 + 50,000] x 2,000

Investment = 39.36 x 2,000

Investment = $78,720

Thus, if the new shares were issued, Larry's investment value in the company would fall from $82,000 to $78,720, confirming his reasons to be worried.