Question

The preemptive right is important to shareholders because it a. allows managers to buy additional shares below the current market price. b. is included in every corporate charter. c. protects the current shareholders against a dilution of their ownership interests. d. protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate. e. will result in higher dividends per share.

Answer 1

Answer:

c. protects the current shareholders against a dilution of their ownership interests.

Explanation:

Preemtive rights of a shareholder is the right of a current shareholder to buy a certain amount of future shares that will be issued by the company. For example if an individual owns 10,000 shares in a company, and the company want to issue 100,000 more shares. The shareholder may have a right to by extra 10,000 shares of the new issue.

This guarantees that old shareholder's ownership interests are not diluted.

Answer 2

Answer:

C. protects the current shareholders against a dilution of their ownership interests.

Explanation:

Preemptive rights are rights given to shareholders in an organization allowing them to buy additional shares in any future issue in order to maintain their percentage ownership, before the shares are available to the general public. It guards against dilution or decrease in a shareholders stake or ownership interest buy allowing them buy more shares for future issues before it is available for the general public to own shares. In doing so, shareholders avoid involuntary dilution.