Larry holds 2,000 shares of common stock in a company that only has 20,000 shares outstanding. The company's stock currently is valued at $41.00 per share. The company needs to raise new capital to invest in production. The company is looking to issue 5,000 new shares at a price of $32.80 per share. Larry worries about the value of his investment.

We have to find the value of Larry's investement before and after the issue of new shares, to see if Larry's worries are justified.

The current value of Larry's investment is:

2,000 x $41.00 = $82,000

To find the value of Larry's investment if the new shares are issued, we use the following formula:

Investment = ¨[[(Oustanding shares x price per share) + (New issue of shares x price per share)]/ Outsanding shares + new issue] x No. of shares held

Investment = [[(20,000 x 41.00) + (5,000 x 32.80)] / 20,000 + 50,000] x 2,000

Investment = 39.36 x 2,000

Investment = $78,720

Thus, if the new shares were issued, Larry's investment value in the company would fall from $82,000 to $78,720, confirming his reasons to be worried.

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