Block17 - Chapter 17 Discussion Questions 17-1. Why has...

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Chapter 17 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 takeovers attempt. 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. S17-1
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17-6. During a rights offering, the underlying stock is said to sell “rights-on” and “ex-rights.” Explain the meaning of these terms and their significance to current stockholders and potential stockholders. 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 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 stockholders 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 appropriate value of the right when the stock moves to an ex-rights designation. 17-7. Why might management use a poison pill strategy? 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 stockholders 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.
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This note was uploaded on 04/10/2011 for the course ADM 474 taught by Professor Stewart during the Spring '10 term at Indiana Wesleyan.

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Block17 - Chapter 17 Discussion Questions 17-1. Why has...

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