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How Corporations Issue Securities : Construct Examples where existing shareholders are made worse off when a company makes a cash offer of new stock below the market price AND when a ....

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Construct a simple example to show the following:

a. Existing shareholders are made worse off when a company makes a cash offer of new stock below the market price.

b. Existing shareholders are not made worse off when a company makes a rights issue of new stock below the market price even if the new stockholders do not wish to take up their rights.

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Solution Summary

Two examples of situations where shareholders are made worse off by stock issues are examined. The solution is detailed and well presented.

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a. For example, Pandora Inc makes a cash offer of 2.5
million new stocks at $5 a share. Before the issue
there were 10 million shares outstanding and teh share
price was $6.

Then after the issue,

the total value of the ...

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