Answer (C) is correct . Common shareholders usually have preemptive rights, which means they have first right to purchase any new issues of stock in proportion to their current ownership percentages. The purpose of a preemptive right is to allow stockholders to maintain their current percentages of ownership. Given that Smith had 2,000,000 shares outstanding ($10,000,000?¡Â $5 par), an investor with 20,000 shares has a 1% ownership. Hence, this investor must be allowed to purchase 4,000 (400,000 shares ¡Á 1%) of the additional shares.Answer (A) is incorrect because To arrive at 1,000 additional shares, the number of shares currently outstanding was incorrectly calculated as 8,000,000 [($12,000,000 + $10,000,000 + $18,000,000) ¡Â $5]. Answer (B) is incorrect because The investor would be allowed to purchase 1% of any new issues. Answer (D) is incorrect because The investor would be allowed to purchase 1% of any new issues.
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