Discussion Questions: Financial Markets and Securities

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5. If common stockholders are the owners of the company, why do they have the last claim on assets and a residual claim on income? Common stock ownership carries three primary rights of privileges. There is a residual claim to income, they alone have the privilege of voting, and they enjoy a first option to purchase new shares. The common stockholder is the last in line to receive payment but the stockholder’s potential participation is unlimited. Instead of getting a $1 dividend, the investor may someday receive many times that much in dividends and also capital appreciation in stock value.

7. Why might management use a poison pill strategy?
A poison pill represents a rights offer made to existing shareholders of a company with the sole purpose of making it more difficult for another firm or outsiders to take over a firm against management’s wishes. Most poison pills have a trigger point tied to the percentage ownership in the company that is acquired by the potential suitor. Once the trigger point is reached, the other shareholders (the existing shareholders) have the right to buy many additional shares of company stock at low prices. This automatically increases the total number of shares outstanding and reduces the voting power of the firm wishing to acquire the company.

Chapter 17
Problems
7. Boson Fishery has been experiencing declining earnings, but has just announced a 50 percent salary increase for its top executives. A dissident group of stockholders wants to oust the existing board of directors. There are currently 11 directors and 60,000 shares of stock outstanding. Mr. Bass, the president of the company, has the full support of the existing board. The dissident stockholders control proxies for 20,001 shares. Mr. Bass is worried about losing his job. a. Under cumulative voting procedures, how many directors can the dissident stockholders elect with the proxies they now hold? No. of directors that can be elected = (Shares owned – 1) x

(Total # of directors to be elected + 1)
(Total number of shares outstanding)

= (20,001 – 1) x (11 + 1) = 20,000 x 12 = 240,000 = 4 directors 60,00060,00060,000

How many directors could they elect under majority rule with these proxies? Under majority voting, any group of stockholders owning over 50 percent of the common stock may elect all of the directors. The dissident stockholders only control 33.4% of the common stock so therefore the cannot elect any stock holders cumulatively.

b. How many shares (or proxies) are needed to elect six directors under cumulative voting? Shares required = (# of directors desired) x (Total # of shares outstanding) Total # of directors to be elected + 1

= 6 x 60,000 = 360,000 = 30,000 shares
11 + 1 12

12. Boles Bottling Co. has issued rights to its shareholders. The subscription price is $45 and four rights are needed along with the subscription price to buy one of the new shares. The stock is selling for $55 rights-on. a. What would be the value of one right?

R = Mo – S
N + 1
R = Value of a right
Mo = Market value of rights-on $55
S = Subscription price $45
N = Number of rights necessary to purchase a new share 4
R = 55 – 45 = 10 = $2.00
4 + 1 5
b. If the stock goes ex-rights, what would the new stock price be?
Me = Mo – R
$55 - $2 = $53.00

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Chapter 18
Discussion Questions
7. If you buy stock on the ex-dividend date, will you receive the upcoming quarterly dividend? No. If you bought the stock on the ex-dividend date or later, your name will eventually be transferred to the corporate books, but you bought the stock without the current quarterly dividend...
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