Chapter 17: Common and Preferred Stock Financing
Chapter 17
Common and Preferred Stock Financing
Discussion Questions
17-1.
Why has corporate management become increasingly sensitive to the
desires of large institutional investors?
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 takeover
attempts.
17-2.
Why might a corporation use a special category such as founders’ stock in
issuing common stock?
Founders’ stock may carry special voting rights that allow the original
founders to maintain voting privileges in excess of their proportionate
ownership.
17-3.
What is the purpose of cumulative voting? Are there any disadvantages to
management?
The purpose of cumulative voting is to allow some minority representation
on the board of directors. A possible disadvantage to management is that
minority stockholders can challenge their actions.
17-4.
How does the preemptive right protect stockholders from dilution?
The preemptive right provides current stockholders with a first option to
buy new shares. In this fashion, their voting right and claim to earnings
cannot be diluted without their consent.
17-5.
If common stockholders are the owners of the company, why do they have
the last claim on assets and a residual claim on income?
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.
Chapter 17: Common and Preferred Stock Financing
Chapter 17
Problems
1. Residual claims to earnings (LO17-1) Folic Acid Inc. has $20 million in earnings, pays
$2.75 million in interest to bondholders, and $1.80 million in dividends to preferred
stockholders.
a. What are the common stockholders’ residual claims to earnings?
b. What are the common stockholders’ legal, enforceable claims to dividends?
17–1. Solution:
Folic Acid Inc.
(in millions)
Chapter 17: Common and Preferred Stock Financing
8. Dissident stockholder group and cumulative voting (LO17-2) The Beasley Corporation
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 14 directors and 32,500 shares of stock outstanding.
Mr. Wright, the president of the company, has the full support of the existing board. The
dissident stockholders control proxies for 15,001 shares. Mr. Wright 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? How many directors could they
elect under majority rule with these proxies?
17–8. Solution:
Beasley Corporation
a. Number of
directors
(Shares owned 1)
(Total number of directors to be elected + 1)
=Total number of shares outstanding
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Chapter 17: Common and Preferred Stock Financing