Suppose you own 500,000 shares of common stock in a firm with 40 million total shares outstanding. The firm announces a plan to sell an additional 5 million shares through a rights offering. The market value of the stock is $32.5 before the rights offering and the new shares are being offered to existing shareholders at a $2.50 discount. If you exercise your preemptive rights,how many of the new shares can you purchase?

Question

Quizplus · Accepted Answer

First, we need to calculate the total number of shares after the rights offering: 
40,000,000 + 5,000,000 = 45,000,000 total shares
Next, we use the proportion method to determine how many new shares we can purchase:
500,000 / 40,000,000 = x / 5,000,000
x = 62,500
Therefore, the answer is (C) 62,500 shares.

Suppose You Own 500,000 Shares of Common Stock in a Firm