Q:

ohn owns stock in GHWB Inc. GHWB Inc. is planning to issue 200,000 shares of common stock to finance a new factory in China. What type of risk does John face and how can he avoid it?A. John faces inflation risk; he can sell his stock before the new shares are issued. B. John faces inflation risk; he can sell his stock after the new shares are issued.C. John faces share dilution risk; he can sell his stock before the new shares are issued.D. John faces share dilution risk; he can sell his stock after the new shares are issued.

Accepted Solution

A:
C is the appropriate choice.

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When the company offers more shares, the existing shares are "diluted," that is, each represents a smaller share in the company.