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1.
Corporate Voting
The shareholders of the Unicorn Company need to elect seven new directors. There
are 600,000 shares outstanding currently trading at $39 per share. You would like to serve
on the board of directors; unfortunately no one else will be voting for you.
a.
How much will it cost you to be certain that you can be elected if the company
uses straight voting?
If the company uses straight voting, the board of directors is elected one at a time. You
will need to own onehalf of the shares, plus one share, in order to guarantee enough votes to win
the election.
So, the number of shares needed to guarantee election under straight voting will be:
Shares needed = (600,000 shares / 2) + 1
Shares needed = 300,001
And the total cost to you will be the shares needed times the price per share, or:
Total cost = 300,001
*
$39
Total cost = $11,700,039
b.
How much will it cost you if the company uses cumulative voting?
If the company uses cumulative voting, the board of directors are all elected at once. You
will need 1/(
N
+ 1) percent of the stock (plus one share) to guarantee election, where
N
is the
number of seats up for election. So, the percentage of the company’s stock you need is:
Percent of stock needed = 1/(
N
+ 1)
Percent of stock needed = 1 / (7 + 1)
Percent of stock needed = .1250 or 12.50%
So, the number of shares you need to purchase is:
Number of shares to purchase = (600,000 × .1250) + 1
Number of shares to purchase = 75,001
And the total cost to you will be the shares needed times the price per share, or:
Total cost = 75,001
*
$39
Total cost = $2,925,039
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View Full Document9.
Valuing Callable Bonds
Illinois Industries has decided to borrow money by issuing perpetual bonds with a
coupon rate of 8 percent, payable annually. The oneyear interest rate is 8 percent. Next
year, there is a 35 percent probability that interest rates will increase to 9 percent, and
there is a 65 percent probability that they will fall to 6 percent.
a.
What will the market value of these bonds be if they are noncallable?
The price of the bond today is the present value of the expected price in one year. So, the
price of the bond in one year if interest rates increase will be:
P1= $80 + $80 / .09
P1 = $968.89
If interest rates fall, the price if the bond in one year will be:
P1= $80 + $80 / .06
P1= $1,413.33
Now we can find the price of the bond today, which will be:
P0= [.35($968.89) + .65($1,413.33)] / 1.08
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 Spring '11
 Emil

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