Question

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

Answer 1

Answer:

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

Explanation:

Shares are ownership interests that are owned by business owners and measures the degree to which an individual has a stake in a company.

Preemtive right occurs when a shareholder has a right to purchase a particular portion of newly issued shares.

For example if an individual has 40,000 shares and additional 250,000 shares are issued, he can have the right to purchase an additional 30,000 of the new shares.

The preemtive right prevents dilution of ownership interests by ensuring old stockholders have a stake in newly issued shares.