CMA Study Group

The equity section of Smith Corporation\'s statement of financial position is presented below.

Preferred stock, $100 par	$12,000,000
Common stock, $5 par	10,000,000
Paid-in capital in excess of par	18,000,000
Retained earnings	9,000,000
Net worth	$49,000,000

The common shareholders of Smith Corporation have preemptive rights. If Smith Corporation issues 400,000 additional shares of common stock at $6 per share, a current holder of 20,000 shares of Smith Corporation's common stock must be given the option to buy

------------------------------
Hajira Khanum A
Student
Bangalore
India
------------------------------

Answer is (c) ...

1 for 5 is being issue hence for 20000 common shareholding he is eligible for 4000 shares 

------------------------------
Rajiv Kumar
Controller
Hajipur
India
------------------------------

The answer is 4000 share, because the total outstanding share before the new Issuing was 2000000 shares, the holder have the 20000 shares before the new issuing, so he/she has 1% of total outstanding share before the new issuing, so he/she have the right to purchase only 1% on new share outstanding and that will equal 4000 shares (1% * 400000).

------------------------------
Hassan Babiker Al Tahir Faky
Student
Khartoum
Sudan
------------------------------

Total number of Common Shares outstanding is 2,000,000 (10M / 5) A person holding 20,000 shares holds 0.01%, this he has preemptive right for additional shares of 4,000 (400,000 X 0.01)

------------------------------
Amin Alvi
Accountant
ABU DHABI
United Arab Emirates
------------------------------

Preferred stock, $100 par	$12,000,000
Common stock, $5 par	10,000,000
Paid-in capital in excess of par	18,000,000
Retained earnings	9,000,000
Net worth	$49,000,000

The common shareholders of Smith Corporation have preemptive rights. If Smith Corporation issues 400,000 additional shares of common stock at $6 per share, a current holder of 20,000 shares of Smith Corporation's common stock must be given the option to buy

currently company no of shares ; 10 m / 5= 2 m

currently ownership ; 20 k/2 m = 0.01 ie , 1 % 

Additional issue shares 400 k , so now total shares 2.4 m 

if you not purchasing shares after issuing new shares your ownership will be diluted 

=20 k/2.4 m = 0.00833 somthing 

if you want maintain your ownership you might be purchase additional shares based on additional issue ( that is preemptive rights )

= 400,000*0.01=4000 shares 

now your total shares = 20,000+4000= 24 k

company total shares = 2.4 m 

ownership = 24 k /2.4m = you will get your same ownership 

------------------------------
Sibli Sameem Kaithakath Thazhathil
Malappuram
India
------------------------------