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Chapter 5: Q4DQ (page 564)

How does the pre-emptive right protect stockholders from dilution?

Short Answer

Expert verified

The pre-emptive right allows the shareholders to maintain their percentage of shares by purchasing additional shares issued by the company.

Step by step solution

01

Step 1:Meaning of dilution of the voting power

The issue of new shares increases the number of shareholders and reduces the power held by existing shareholders, which is called dilution of the voting power of shareholders.

02

Step 2:The advantages of pre-emptive right to shareholders

The pre-emptive right helps a stockholder in protecting their ownership interest. This right allows the shareholders to maintain their voting power by purchasing additional shares being issued by the company.

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