With the savings from your summer job you were able to buy 500 shares of a hot new Internet company last year. A few months after your purchase, the company was low on cash and needed to raise more equity capital. The company’s charter provided a pre-emptive right to shareholders, so you were offered the chance to buy one additional share for each five owned.
a. What percentage of the firm’s equity will you own after your initial purchase if there are 500,000 shares outstanding?
b. What percentage of the firm’s equity will you own if you buy the extra shares offered?
c. If you decline to buy the additional shares (but they are sold to other investors), how much of the firm’s equity will you own?