Chap 17 Solman Finman

Topics: Stock, Stock market, Preferred stock Pages: 17 (3182 words) Published: January 26, 2013
Chapter 17

Discussion Questions

17-1.Corporate management has become increasingly sensitive to the desires of large institutional investors because they fear these shareholders may side with corporate raiders in voting their shares in mergers or takeovers attempts.

17-2.There is no difference in dividend payments. The difference in trading values reflects a premium for being able to participate in electing a majority to the board of directors.

17-3.Usually corporations issue different classes of stock so that a controlling group can continue to control the board with a relatively small number of shares.

17-4.One disadvantage is that so-called non-voting shareholders generally contribute the bulk of the equity capital and get to elect only a minority of board members. Another is that in case of a takeover promising large premiums the non-voting shares can be ignored and therefore not get the same financial benefit as the voting shares.

17-5.The purpose of cumulative voting is to allow some minority representation on the board of directors. A possible disadvantage to management is that minority shareholders can challenge their actions.

17-6.Mainly because of the non-taxable nature of the dividends received by corporations and the dividend tax credit accorded individuals.

17-7.The preemptive right provides current shareholders with a first option to buy new shares. In this fashion, their voting right and claim to earnings cannot be diluted without their consent.

17-8.The actual owners have the last claim to any and all funds that remain. If the firm is profitable, this could represent a substantial amount. Thus, the residual claim may represent a privilege as well as a potential drawback. Generally, other providers of capital may only receive a fixed amount.

17-9.When a rights offering is announced, a stock initially trades rights-on, that is, if you buy the stock you will also acquire a right toward future purchase of the stock.

After a certain period of time (say four weeks), the stock goes ex-rights; thus when you buy the stock you no longer get a right toward future purchase of stock.

The significance to current and future shareholders is that they must decide if they wish to use or sell the right when the stock is trading rights-on. The stock will go down by the approximate value of the right when the stock moves to an ex-rights designation.

17-10.A poison pill may help management defend itself against a potential takeover attempt. When another company attempts to acquire the firm, the poison pill allows current shareholders to acquire additional shares at a very low price. This increases the shares outstanding and makes it more difficult for the potential acquiring company to successfully complete the merger.

17-11.Preferred stock is a ‘hybrid’ or intermediate form of security possessing some of the characteristics of debt and common stock. The fixed amount provision is similar to debt, but the non-contractual obligation is similar to common stock. Though the preferred shareholder does not have an ownership interest in the firm, the priority of claim is higher than that of the common shareholder.

17-12.Preferred stock may offer a slightly lower yield than bonds in spite of greater risk because corporate recipients of preferred stock dividends may receive them tax free while individuals can apply the dividend tax credit.

17-13.With the cumulative feature, if preferred stock dividends are not paid in any one year, they accumulate and must be paid in total before common shareholders can receive dividends. Even though preferred stock dividends are not a contractual obligation as is true of interest on debt, the cumulative feature tends to make corporations very aware of obligations to preferred shareholders. Preferred shareholders may even receive new securities for forgiveness of missed dividend payments.

17-14.The participation privileges of a few preferred...
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