Dilutive effects of stock options. Refer to the schedule in Exhibit 12.6, which shows employee stock option data for General Electric Company (GE). At December 31.

Year 3. employees held 2.7 million options giving them the right to purchase shares at an average of $54 per share. Total shareholders' equity at December 31, Year 3, was about $2.5 billion.

a. If GE were to issue 2.7 million shares in a public offering at the market price per share on December 31, Year 3, what would be the proceeds of the issue?

b. If GE were to issue 2.7 million shares to employees who exercised all outstanding stock options, what would be the proceeds of the issue?

c. Are GE's shareholders better off under a or under b?

d. The text accompanying the stock option data in the GE annual report reads, in part, as follows:

Option price under these plans is the full market value of General Electric common stock on date of grant. Therefore, participants in the plans do not benefit unless the stock's market price rises, thus benefiting all share owners.

GE seems to be saying that these options do not harm shareholders, whereas your answers to parts a and b show that shareholders are worse off when holders exercise options than when the firm issues shares to the public. Attempt to reconcile GE's statement with your own analysis in parts a and b.