Question

Harold owns 10% of the total shares of a corporation. The corporation decides to issue 200,000 worth of new shares of stock. How many shares of stock is Harold entitled to purchase if he wants? What is this stockholder's right called?

Answer 1

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Number of shares of stock Harold is entitled to purchase = Percentage of existing holding X Number of new shares to be issued

Parameters provided in the question

• Existing percentage of ownership = 10%
• New issue = 200,000

Substituting the values

Number of shares of stock Harold is entitled to purchase = 10% X 200,000

Number of shares of stock Harold is entitled to purchase = 20,000 shares

Therefore, Harold will be entitled to purchase 20,000 shares

This stockholder's right is called rights issue

A rights issue is a way by which a listed firm can raise further capital. Here, instead of going to the public, the company gives its existing shareholders the right to subscribe to newly issued shares in proportion to their existing holdings.