Before a seasoned stock offering, you owned 500 shares of a firm that had 20,000 shares outstanding. After the seasoned offering, you still owned 500 shares but the number of shares outstanding rose to 25,000. Which one of the following terms best describes this situation?

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Quizplus · Accepted Answer

The increase in the number of outstanding shares from 20,000 to 25,000 indicates that there has been a dilution in ownership percentage for existing shareholders, including the shareholder in question who still owns the same 500 shares. Therefore, option B, Percentage ownership dilution, is the best choice to describe this situation. Overallotment (A) refers to the sale of more shares than the offering size, Green Shoe allocation (C) refers to an option granted to underwriters to sell additional shares of an IPO, and Red herring allotment (D) refers to a preliminary prospectus provided to potential investors in an IPO. Abnormal event (E) is a vague term and does not apply to this situation.

Before a Seasoned Stock Offering, You Owned 500 Shares of a Firm