5283answers11.apr053 - 1 End of Chapter 11 Questions,...

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CORPORATE FINANCE Professor Megginson April 5, 2003 Questions [See problems in book] *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** Answers to End of Chapter 11 Questions 11.1) In the U.S., common stock can be sold with and without a par value. Par value has little real economic significance. Most firms set a very low par value. Many states do not allow a firm to sell shares at a price below par value, so there is a strong incentive to set par value low, so it does not become a constraint on the company. 11.2) If you know the total shares issued, then multiply the par value times the total number of shares issued, and add this number to total additional paid-in capital. This is the amount of initial proceeds. Divide this by number of shares to get a per share value of the proceeds. 11.3) Take the number of issued shares and subtract the amount of treasury stock to get the number of shares outstanding. A company typically has treasury stock as the result of stock repurchases. A firm may hold treasury stock to pay its employees incentives or for use in employee stock purchase plans. 11.4) Common shareholders are residual claimants because they have the rights to the firm’s assets after debtholders and preferred shareholders have been paid. This says that common stock is the riskiest of these securities since it is last in line in its claim on the firm’s assets. As the riskiest asset, it also should have the highest return. 11.5) In a majority voting structure, a simple majority rules. In a cumulative voting structure, each share is entitled to a number of votes equal to the number of directors being elected. A cumulative voting system makes it easier for minority shareholders to elect directors because they can pool all of their votes and concentrate all of their votes on one or two contested board seats. 11.6) A proxy fight is an attempt by minority shareholders to elect their own directors and ultimately gain control of the board of directors. Management has an advantage in a proxy contest – they can solicit shareholders’ votes at company expense. It is very expensive for minority shareholders to mount a proxy fight. 11.7) Preferred stock is a hybrid security because it is contains some features of both debt and equity. It pays a dividend like common equity, and the dividend can be missed without forcing the firm into default. If a firm goes into default, sometimes preferred shareholders will get a seat on the board of directors and a say in the company’s running. Preferred stock pays a fixed income like debt does, making it resemble a perpetual bond. The preferred dividend does not increase, even if the firm is doing well. U.S. corporations prefer to receive preferred dividends rather than debt coupon payments because they are able to exclude most of the dividend income received from their taxable income. 1
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This note was uploaded on 02/23/2009 for the course BUSI 233 taught by Professor Harold during the Spring '07 term at Howard County Community College.

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5283answers11.apr053 - 1 End of Chapter 11 Questions,...

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