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.
