SIE Understanding Products and Their Risks Question 38: Answer and Explanation

Question: 38

Which of the following scenarios represents a stockholder fully exercising the Right of First Refusal?

• A. Of 1,000,000 common shares issued, a shareholder owns 500,000 common shares and purchases 5,000 shares of a new issue.
• B. Of 1,000,000 common shares issued, a shareholder owns 500,000 common shares and purchases 5% of a new issue.
• C. Of 1,000,000 common shares issued, a shareholder owns 500,000 common shares and purchases 50% of a new issue.
• D. Of 1,000,000 common shares issued, a shareholder owns 500,000 common shares and purchases 500,000 shares of a new issue.

Correct Answer: C

Explanation:

C: Choice C is correct since the common shareholder owns 50% of the outstanding shares, the shareholder may purchase 50% of the new issue. Choices A and D do not indicate what portion of the new issue 5,000 shares, or 500,000 shares, represents. Choice B is incorrect as the shareholder has only exercised 5% of the new issue and is entitled to 50% of the new issue.