(Preemptive Rights and Dilution of Ownership) Wallace Computer Company is a small, closely-held corporation. Eighty percent of the stock is held by Derek Wallace, president. Of the remainder, 10% is held by members of his family and 10% by Kathy Baker, a former officer who is now retired. The balance sheet of the company at June 30, 2017, was substantially as shown below.
Asset
Current assets \(22,000
Equipment (net) 450,000
\)472,000
Liabilities and Stockholders’ Equity
Current liabilities \(50,000
Common stock 250,000
Retained earnings 172,000
\)472,000
Additional authorized common stock of \(300,000 par value had never been issued. To strengthen the cash position of the company, Wallace issued common stock with a par value of \)100,000 to himself at par for cash. At the next stockholders’ meeting, Baker objected and claimed that her interests had been injured.
Instructions
- Which stockholder’s right was ignored in the issue of shares to Derek Wallace?
- How may the damage to Baker’s interests be repaired most simply?
- If Derek Wallace offered Baker a personal cash settlement and they agreed to employ you as an impartial arbitrator to determine the amount, what settlement would you propose? Present your calculations with sufficient explanation to satisfy both parties.
