Finance Chapter 17

8/10/2019 Finance Chapter 17

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Chapter 17

Discussion Questions

17-1. Why has corporate management become increasingly sensitive to thedesires of large institutional investors?

Corporate management has become increasingly sensitive to the desires oflarge institutional investors because they fear these shareholders may sidewith corporate raiders in voting their shares in mergers or takeoversattempt.

17-2. Why might a corporation use a special category such as founders stock inissuing common stock?

!ounders stock may carry special voting rights that allow the originalfounders to maintain voting privileges in e"cess of their proportionateownership.

17-#. What is the purpose of cumulative voting? $re there any disadvantages tomanagement?

%he purpose of cumulative voting is to allow some minority representationon the board of directors. $ possible disadvantage to management is thatminority stockholders can challenge their actions.

17-&. 'ow does the preemptive right protect stockholders from dilution?

%he preemptive right provides current stockholders with a first option tobuy new shares. (n this fashion) their voting right and claim to earningscannot be diluted without their consent.

17-*. (f common stockholders are the ownersof the company) why do they havethe last claim on assets and a residual claim on income?

%he actual owners have the last claim to any and all funds that remain. (fthe firm is profitable) this could represent a substantial amount. %hus) theresidual claim may represent a privilege as well as a potential drawback.+enerally) other providers of capital may only receive a fi"ed amount.

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17-. uring a rights offering) the underlying stock is said to sell /rights-on0 and

/e"-rights.0 "plain the meaning of these terms and their significance tocurrent stockholders and potential stockholders.

When a rights offering is announced) a stock initially trades rights-on) thatis) if you buy the stock you will also acuire a right toward future purchaseof stock.

$fter a certain period of time 3say four weeks4) the stock goes e"-rights5thus when you buy the stock you no longer get a right toward futurepurchase of stock.

%he significance to current and future stockholders is that they must decideif they wish to use or sell the right when the stock is trading rights-on. %hestock will go down by the appropriate value of the right when the stock

moves to an e"-rights designation.

17-7. Why might management use a poison pill strategy?

$ poison pill may help management defend itself against a potentialtakeover attempt. When another company attempts to acuire the firm) thepoison pill allows current stockholders to acuire additional shares at avery low price. %his increases the shares outstanding and makes it moredifficult for the potential acuiring company to successfully complete themerger.

17-6. referred stock is often referred to as a hybrid security. What is meant bythis term as applied to preferred stock?

referred stock is a /hybrid0 or intermediate form of security possessingsome of the characteristics of debt and common stock. %he fi"ed amountprovision is similar to debt) but the noncontractual obligation is similar tocommon stock. %hough the preferred stockholder does not have anownership interest in the firm) the priority of claim is higher than that ofthe common stockholder.

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17-8. What is the most likely e"planation for the use of preferred stock from acorporate viewpoint?

9ost corporations that issue preferred stock do so to achieve a balance intheir capital structure. (t is a means of e"panding the capital base of the

firm without diluting the common stock ownership position or incurringcontractual debt obligations.

17-1:. Why is the cumulative feature of preferred stock particularly important topreferred stockholders?

With the cumulative feature) if preferred stock dividends are not paid inany one year) they accumulate and must be paid in total before commonstockholders can receive dividends. ven though preferred stockdividends are not a contractual obligation as is true of interest on debt) the

cumulative feature tends to make corporations very aware of obligationsto preferred stockholders. referred stockholders may even receive newsecurities for forgiveness of missed dividend payments.

17-11. $ small amount of preferred stock is participating. What would yourreaction be if someone said common stock is also participating?

%he participation privileges of a few preferred stock issues mean thatpreferred stockholders may receive a payout over and above the uotedrate when the corporation en;oys a particularly good year. %his is very

similar to the situation with common stock and one can certainly say thatcommon stock is a participation-type security.

17-12. What is an advantage of floating rate preferred stock for the risk-averseinvestor?

%here is less price volatility than with regular preferred stock.

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Chapter 17

Problems

1. !olic $cid) (nc.) has 2: million in earnings) pays 2.7* million in interest to bondholders)and 1.6: 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!

a. arnings 2:.::@(nterest 2.7*@referred stock dividends 1.6:Common stockholders residual claim to earnings 1*.&*

b. Aone. %he common stockholders have no legal) enforceableclaim to dividends. %he corporation may choose to paydividends) but it is not a legal obligation.

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2. %ime Watch Co. has & million in earnings and is considering paying .&* million ininterest to bondholders and &.#* million to preferred stockholders in dividends.

a. What are the bondholders contractual claims to payment? 3=ou may wish to review!igure 17-#4?

b. What are the preferred stockholders immediate contractual claims to payment? Whatprivilege do they have?

17-". Solution:

#ime $atch Co.

a. %he bondholders have a legal contractual claim of.&* million.

b. %he preferred stockholders do not have an immediatecontractual claim to payment of dividends.'owever) they must receive payment before the commonstockholders receive anything.

#. Batie 'olmes and +arden Co. has 1:)&:)::: shares outstanding. %he stock is currentlyselling at *2 per share. (f an unfriendly outside group acuired 2* percent of the shares)e"isting stockholders will be able to buy new shares at #: percent below the currentlye"isting stock price.

a. 'ow many shares must the unfriendly outside group acuire for the poison pill to gointo effect?

b. What will be the new purchase price for the e"isting stockholders?

17-%. Solution:

&atie 'olmes and (arden Co.

a. 1:)&:)::: %otal shares

2* %rigger point 2):)::: Aumber of shares to trigger the poison pill

b. *2 Current stock price 7: #: reduction to current stockholders

#.&: rice to e"isting stockholders

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&. 9r. 9eyers wishes to know how many shares are necessary to elect * directors out of1& directors up for election in the $ustin ower Company. %here are 1*:)::: sharesoutstanding. 3Dse !ormula 17-1 to determine the answer.4

17-). Solution:

Austin Po*er Compan+

3Aumber of directors desired4 E

3%otal number of shares outstanding4,hares reuired F G 1

%otal number of directors to be elected G1

F* E1*:)::: 7*:):::

G 1 F G 11& G 1 1*

F *:)::: G 1 F *:)::1 shares

*. Carl 'ubbell owns )::1 shares of the iston Corp. %here are 12 seats on the companyboard of directors) and the company has a total of 76)::: shares of stock outstanding.%he iston Corp. utiliHes cumulative voting.

Can 9r. 'ubbell elect himself to the board when the vote to elect 12 directors is heldne"t week? 3Dse !ormula 17-2 to determine if he can elect one director.4

17-. Solution:

Piston Corporation

3,hares owned 14

Aumber of directors

that can be elected

3%otal number of directors to be elected4 G 1F

%otal number of shares outstanding

3)::1 14 312 14 )::: 1# 76):::76)::: 76)::: 76)::: +

= = F 1 director

=es) 9r. 'ubbell can elect himself to the board.

,17-7


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. $nita Iob owns *:7 shares in the Japid mployment Corp. 3a firm that provides temporarywork4. %here are 11 directors to be elected. %wenty-one thousand shares are outstanding.%he firm has adopted cumulative voting.

a. 'ow many total votes can be cast?b. 'ow many votes does $nita Iob control?c. What percentage of the total votes does she control?

17-. Solution:

apid /mplo+ment Corp.

Kotes F Aumber of shares E number of directors to be elected

a. 21)::: E 11 F 2#1)::: votes

b. *:7 E 11 F *)*77 votes

c. *)*77L2#1)::: F 2.&1

7. Moston !ishery has been e"periencing declining earnings) but has ;ust announced a *:percent salary increase for its top e"ecutives. $ dissident group of stockholders wants tooust the e"isting board of directors. %here are currently 11 directors and :)::: shares ofstock outstanding. 9r. Mass) the president of the company) has the full support of thee"isting board. %he dissident stockholders control pro"ies for 2:)::1 shares. 9r. Mass isworried about losing his ;ob.

a. Dnder cumulative voting procedures) how many directors can the dissidentstockholders elect with the pro"ies they now hold? 'ow many directors could theyelect under ma;ority rule with these pro"ies?

b. 'ow many shares 3or pro"ies4 are needed to elect si" directors under cumulative voting?

17-7. Solution:

0oston Fisher+

a. Aumber of directors thatcan be elected

,17-6

3,hares owned 14

3%otal number of directors to be elected4 G 1F



9/30

17-7. Continued!

32:)::1 14 311 14 2&:)::: &:)::: :):::

+= =

!our directors can be elected by the dissident stockholdersunder cumulative voting.

Aone would be elected by the dissidents under ma;ority rulebecause the e"isting board controls over *: percent of theshares.

3Aumber of directors desired4

b.3%otal number of shares outstanding4

,hares reuired F 1%otal number of directors to be elected G1

+

:)::: #:):::1 1 #:)::1 shares

11 1 12

= + = + =

+

6. +ala"y Corporation is holding a stockholders meeting ne"t month. 9r. ,tarr is thepresident of the company and has the support of the e"isting board of directors. $ll ninemembers of the board are up for reelection. $rt Nevine is a dissident stockholder.'e controls pro"ies for #:)::1 shares. 9r. ,tarr and his friends on the board control*:)::1 shares. >ther stockholders) whose loyalties are unknown) will be voting theremaining 18)886 shares. %he company uses cumulative voting.

a. 'ow many directors can 9r. Nevine be sure of electing?b. 'ow many directors can 9r. ,tarr and his friends be sure of electing?c. 'ow many directors could 9r. Nevine elect if he obtains all the pro"ies for the

uncommitted votes? 3Dneven values must be rounded downto the nearest wholenumber regardless of the amount.4

17-. Solution:

(ala2+ Corporation

a. Aumber of directors thatcan be elected

,17-8

3,hares owned 14

3%otal number of directors to be elected4F 1


+


10/30

17-. Continued!

3#:)::1 14 38 14

3#:)::: *:)::1 18)8864

+=

+ +

#:)::: 1:# directors

1::):::

= =

9r. Nevine can be assured of electing # directors.

b.3*:)::1 14 38 14 *:)::: 1:

1::)::: 1::):::

+ =

*::):::* directors

1::):::= =

9r. ,tarr and his friends can be assured of electing* directors.

c. (f 9r. ,tarrs group can elect * of 8 directors) 9r. Nevinecould elect & if he controlled all the other votes.

3

3#:)::1 18)886 14 38 14 &8)886 1:

1::)::: 1::):::

+ + = =

&88)86:&.8886 & directors 3rounded down4

1::):::= = =

,17-1:


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11. 'iggins 9etal Company was established in 186:. !our years later the company wentpublic. $t that time) 'enry 'iggins) the original owner) decided to establish two classesof stock. %he first represents Class $ founders stock and is entitled to 1: votes per share.%he normally traded common stock) designated as Class M) is entitled to one vote per share.(n late 2::& 9r. $ndrews was considering purchasing shares in 'iggins 9etal Company.

While he knew the e"istence of founders shares were not prevalent in many companies) hedecided to buy the shares anyway because of a new high-technology melting process thecompany had developed.

>f the 1.& million total shares currently outstanding) the original founders family owns*2)*2* shares. What is the percentage of the founders family votes to Class M votes?

17-11. Solution:

'iins 8etal Compan+

!ounders family votes F ,hares owned E 1:F *2)*2* E1:F *2*)2*:

Class M votes F %otal shares @ founders family sharesF 1)&::)::: @ *2)*2*F 1)#&7)&7*

!ounders !amily Kotes *2*)2*: #6.86Class M Kotes 1)#&7)&*7

= =

,17-12


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12. Moles Mottling Co. has issued rights to its shareholders. %he subscription price is &*and four rights are needed along with the subscription price to buy one of the new shares.%he stock is selling for ** rights-on.

a. What would be the value of one right?b. (f the stock goes e"-rights) what would the new stock price be?

17-1".Solution:

0oles 0ottlin Co.

a.9 ,

J FA G 1

o

** &* 1: 2.:: per right& 1 *

= = =

+

b. **.:: @ 2.:: F @*#.::

%he stock price will decrease by the amount of the rightsvalue.

,17-1#


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1#. 'armon Candy Co. has announced a rights offering for its shareholders. Cindy Marr owns*:: shares of 'armon Candy Co. stock. !ive rights plus 2 cash are needed to buy one ofthe new shares. %he stock is currently selling for 7: rights-on.

a. What is the value of a right?b. 'ow many of the new shares could Cindy buy if she e"ercised all her rights? 'ow

much cash would this reuire?c. Cindy doesnt know if she wants to e"ercise her rights or sell them. What alternative

would have the most beneficial effect on her wealth?

17-1%.Solution:

'armon Cand+ Compan+

a.9 ,

J F

A G 1

o

7: 2 61.## per right

* 1

= = =

+

b. Cindy owns *:: shares so she would receive *:: rights.*:: rightsL* rights per share F 1:: shares. 1:: shares E 2subscription price F )2:: cash needed.

c. Aeither e"ercising the rights nor selling them would have anyeffect on the stockholders wealth 3all things being eual4.

,17-1&


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1&. Carl 9artin has 8)::: to invest. 'e has been looking at Marton etroleum common stock.Marton has issued a rights offering to its common stockholders. ,i" rights plus *1 cashwill buy one new share. Martons stock is selling for : e"-rights.

a. 'ow many rights could Carl buy with his 8):::? $lternatively) how many sharesof stock could he buy with the same 8)::: at : per share?

b. (f Carl invests his 8)::: in Marton rights and the price of Marton stock rises to 72per share e"-rights) what would his dollar profit on the rights be? 3!irst computeprofit per right.4

c. (f Carl invests his 8)::: in Marton stock and the price of the stock rises to 72 pershare e"-rights) what would his total dollar profit be?

d. What would be the answer to part bif the price of Martons stock falls to &* pershare e"-rights instead of rising to 72?

e. What would be the answer to part cif the price of Martons stock falls to &* per sharee"-rights?

17-1).Solution:0arton Petroleum

Carl 8artin!

a. e9 ,

J FA

: *11.*: per right

= =

8)::: investmentL1.*: per right F )::: rights8)::: investmentL: per share F 1*: shares

b. 372 @ *14L F #.*: per right value#.*: per right value @ 1.*: F 2.:: profit per rights2.:: E )::: rights F 12)::: total profit on rights

c. 372 @ :4 F 12 profit per share12 E 1*: shares F 1)6:: total dollar profit on the stock

,17-1*


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17-1). Continued!

d. 3&* @ *14L F @1.::5 the rights value F :

%om would lose his entire 8)::: investment.

e. 3&* @ :4 F 1* loss per share@1* E 1*: F @2)2*:

%om would lose 2)2*: on his 8)::: investment.

1*. 9r. and 9rs. $nderson own five shares of 9agic %ricks Corporations common stock.%he market value of the stock is :. %he $ndersons also have &6 in cash. %hey have ;ust

received word of a rights offering. >ne new share of stock can be purchased at &6 foreach five shares currently owned 3based on five rights4.

a. What is the value of a right?b. What is the value of the $ndersons portfolio before the rights offering? 3ortfolio in

this uestion represents stock plus cash.4c. (f the $ndersons participate in the rights offering) what will be the value of their

portfolio) based on the diluted value 3e"-rights4 of the stock?d. (f they sell their five rights but keep their stock at its diluted value and hold on to their

cash) what will be the value of their portfolio?

17-1.Solution:

8aic #ric9s Corp.

#he Andersons!

a.o9 ,

J FA G 1

: &6 12

2* 1

= = =

+

b. ortfolio value,tock * E : F #::Cash &6%otal ortfolio Kalue #&6

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18/30

1. Bristy !ashions) (nc.) has &.* million shares of common stock outstanding. %he currentmarket price of Bristy !ashions common stock is : per share rights-on. %he companysnet income this year is 16 million. $ rights offering has been announced in which &*:):::new shares will be sold at ** per share. %he subscription price of ** plus 1: rights isneeded to buy one of the new shares.

a. What are the earnings per share and price-earnings ratio before the new shares aresold via the rights offering?

b. What would the earnings per share be immediately after the rights offering? Whatwould the price-earnings ratio be immediately after the rights offering? 3$ssume thereis no change in the market value of the stock) e"cept for the change that occurs whenthe stock begins trading e"-rights.4 Jound all answers to two places to the right of thedecimal point.

17-1.Solution:

#he &rist+ Fashions, Inc.

a. 16 million earningsL&.* million shares F &.:: earningsper share: market priceL&.:: earnings per share F 1* price-earnings ratio

b. &.* million original shares G &*:)::: new sharesF &)8*:)::: shares

16 million earningsL&)8*:)::: shares F #.& earningsper share

Kalue of each rightO

o9 , : ** *J F .&*A G 1 1: 1 11

= = =

+

,hare price 3e"-rights4O: per share @ .&* F *8.**

*8.** market price per shareL#.& earnings per shareF 1.# price-earnings ratio

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17. %he ,helton Corporation has some e"cess cash that it would like to invest in marketablesecurities for a long-term hold. (ts vice-president of finance is considering threeinvestments 3,helton Corporation is in a #* percent ta" bracket and the ta" rate ondividends is 1* percent4. Which one should he select based on afterta" returnO 3a4 %reasurybonds at a 7 percent yield5 3b4 corporate bonds at a 1: percent yield5 or 3c4 preferred stock

at an 6 percent yield?

17-17.Solution:

Shelton Corporation

a. %reasury bonds 7 E 31 @ .#*4 F 7 E .* F &.**

b. Corporate bonds 1: E 31 @ .#*4 F 1: E .* F .*:

c. referred stock 7: of the dividend is e"cluded fromcorporate ta"es so only #: is ta"able. %he ta" rate ondividends is 1* percent. We subtract the ta"es from theyield.

=ield @ ta"es6 @ 36 E .#:4 3.1*46 @ 32.&4 3.1*4

6 @ .# F 7.&

%he referred stock offers the highest afterta" return.

,17-18


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16. ,ilicon (ndustries has a cumulative preferred stock issue outstanding) which has a statedannual dividend of 6 per share. %he company has been losing money and has not paidpreferred dividends for the last four years. %here are 2:)::: shares of preferred stockoutstanding and *::)::: shares of common stock.

a. 'ow much is the company behind in preferred dividends?b. (f ,ilicon (ndustries earns 7.* million in the coming year after ta"es and before

dividends) and this is all paid out to the preferred stockholders) how much will thecompany be in arrears 3behind in payments4? Beep in mind that the coming yearwould represent the fifth year.

c. 'ow much) if any) would be available in common stock dividends in the coming yearif 7.* million is earned as e"plained in part b?

17-1.Solution:

Silicon Industries

a. 6 per share E 2:)::: shares E & years F 6)#2:):::dividends in arrears.

b. 6 per share E 2:)::: shares E * years F 1:)&::):::9inus profits of @ 7)*::):::ividends still in arrears 2)8::):::

c. Ao common stock dividends can be paid until all thepreferred dividends are paid to the cumulative preferredstockholders.

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18. (ndustrial +as Company is four years in arrears on cumulative preferred stock dividends.%here are *:)::: preferred shares outstanding) and the annual dividend is 7 per share. %hevice-president of finance sees no real hope of paying the dividends in arrears. 'e is devisinga plan to compensate the preferred stockholders for 8: percent of the dividends in arrears.

a. 'ow much should the compensation be?b. (ndustrial +as Company will compensate the preferred stockholders in the form of

bonds paying 12 percent interest in a market environment in which the going rateof interest is 1& percent. %he bonds will have a 2*-year maturity. Dsing the bondvaluation table in Chapter 1 3%able 1@#4) indicate the market valueof a 1)::: par value bond.

c. Mased on market value) how many bonds must be issued to provide the compensationdetermined in part a? 3Jound to the nearest whole number.4

17-14.Solution:

Industrial (as Compan+

a. 7 per share E *:)::: shares E & years F 16)2::):::dividends in arrears.

16)2::)::: E 8: F 1)#6:)::: compensation

b. 62.:

c. Compensation 1)#6:):::Mond value P 62.:

Aumber of bonds toprovide compensation 18)::1

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2:. %he treasurer of +arcia 9e"ican Jestaurants 3a corporation4 currently has 1::):::invested in preferred stock yielding 7.* percent. 'e appreciates the ta" advantages ofpreferred stock and is considering buying 1::)::: more with borrowed funds. %he costof the borrowed funds is 8.* percent. 'e suggests this proposal to his board of directors.%he directors are somewhat concerned by the fact that the treasurer is paying 2 percent

more for funds than will be earned. %he firm is in a #& percent ta" bracket) with dividendsta"ed at 1* percent.

a. Compute the amount of the afterta" income from the additional preferred stock if it ispurchased.

b. Compute the afterta" borrowing cost to purchase the additional preferred stock. %hatis) multiply the interest cost times 31 @ %4.

c. ,hould the treasurer proceed with his proposal?d. (f interest rates and dividend yields in the market go up si" months after a decision to

purchase is made) what impact will this have on the outcome?

17-"5.Solution:(arcia 8e2ican estaurants

a. referred ,tock.................... 1::):::ividend yield..................... 7.*ividend.............................. 7)*::%a"able income 3#:4........ 2)2*:%a" rate 31*4..................... ##7.*:

$fterta" income.................. 7)12.*: 37)*:: @ ##7.*:4

b. Noan.................................... 1::):::(nterest e"pense................... 8.*(nterest................................. 8)*::E 31 @ %4.............................. $fterta" borrowing cost...... )27:

c. =es) the afterta" income e"ceeds the afterta" borrowing

cost. >f course) other factors may be considered as well.

,17-22


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17-"5. Continued!

d. %he outcome could become uite unfavorable for tworeasons. %he increase in dividend yield would lower

the value of the 1::)::: portfolio. $lso) interest ratesgenerally are not fi"ed on a loan of this nature. %hus)the borrowing cost could go up.

Aote the dangers of these problems could be overcome bybuying floating rate preferred stock. %he market value ofthe portfolio would be fi"ed) and preferred stock yields andinterest rates would) in all likelihood) move up and down

together.

21. Jeferring back to the original information in problem 2:) if the yield on the 1::):::of preferred stock is still 7.* percent and the borrowing cost remains 8.* percent) but thecorporate ta" rate is only 2: percent) is this a feasible investment? %he ta" rate ondividends is still 1* percent.

17-"1.Solution:

(arcia 8e2ican estaurants Continued!

ividend........................... 7)*::%a"able income 3#:4. 2)2*:%a" rate 31*4.................. ##7.*:$fterta" income................ 7)12.*: 37)*:: @ ##7.*:4

(nterest.............................. 8)*::E 31 @ %4............................ 6:$fterta" borrowing cost.... 7)::

Ao) the afterta" income is now less than the after ta"borrowing cost.

,17-2#


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22. 'ailey %ransmission has two classes of preferred stockO floating rate preferred stock andstraight 3normal4 preferred stock. Moth issues have a par value of 1::. %he floating ratepreferred stock pays an annual dividend yield of 7 percent) and the straight preferred stockpays 6 percent. ,ince the issuance of the two securities) interest rates have gone up by# percent for each issue. Moth securities will pay their year-end dividend today.

a. What is the price of the floating rate preferred stock likely to be?b. What is the price of the straight preferred stock likely to be? Jefer back to Chapter 1:

and use !ormula 1:@& to answer this uestion.

17-"".Solution:

'aile+ #ransmissions

a. %he floating rate preferred stock should be trading at veryclose to the par value of 1:: since interest rates will ad;ustto current market conditions rather than price.

b. Mased on formula 1:-&) the price of straight preferred stockwill beO

77

7

6 72.7#

B .11= = =

,17-2&


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C38P/'/SI;/ P30


26/30

Jeuired funds 8::):::Aumber of new shares F 22)*::

,ubscription price &:= =

>ld shares 1::):::Aumber of rights to purchase one share F &.&Aew shares 22)*::

= =

&: discount-subscription price euals #:

Jeuired funds 8::):::Aumber of new shares F #:):::

,ubscription price #:= =

>ld shares 1::):::Aumber of rights to purchase one share F #.#

Aew shares #:):::= =

b.o9 ,

J FAG1

1:

?*: &* ?*J F ?.6#* 1 -

= =

+

2:

?*: &: ?1:J F ?1.6*&.& 1 *.&

= =

+

&:

*: #: 2:J F &.*

#.# 1 &.#

= =

+

,17-2


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CP 17-1. Continued!

c. , before rights offering F net incomeLold shares*::):::L1::)::: F *.::

, after rights offering F net incomeL3old G new shares4*::):::L12:)::: F &.17

d. 2: increase in shares outstanding 31::)::: to 12:):::4

e. Mefore 1:: shares E *.:: F *::$fter 12: shares E &.17 F *:: 3rounded4

f. Ao) he would e"pect greater earnings. 'e and others have putadditional capital into the corporation so total claims to earningsshould improve. (nvested capital has increased from *):::):::to *)8::):::. 'e earned *:: before he put 8:: more 32: shs.E &*4 of additional funds in the corporation. >ver time) earningsshould increase.

,17-27


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C38P/'/SI;/ P30


29/30

CP 17-". Solution:

Portable ne more share than Jom would necessitate an ownership of1)2*:)::1 shares. ,ince /friendly0 interest to N( already own#*:)::: shares) this would mean they would need to acuire

8::)::1 additional shares.

,17-28


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CP 17-". Continued!

Mecause under the poison pill provision) they can buy at 6: ofcurrent market value) the total cost of the 8::)::1 shares would be

*8):&:):*.

8::)::1 additional shares *.: cost per shareQ*8):&:):* total cost

Q62 E 6: 3poison pill provision4 F *.:

d. =es) the poison pill is an effective deterrent in this case. With1)7::)::: shares outstanding and the /friendly0 interests alreadyowning #*:)::: shares) the most that Jom could acuire is1)#*:):::. ,ince the poison pill provision allows up to 1)1::):::additional shares to be purchased by /friendly0 interests) the/friendly0 interests are assured of always owning more than1)#*:)::: shares. %heir total potential is 1)&*:)::: shares 3#*:):::shares currently owned plus 1)1::)::: under the poison pill plan4.

Ruite likely) the poison pill is not in the best interest of the generalshareholders. Without the poison pill) N( is more likely to be amerger takeover candidate. >ften a price is offered well in e"cessof current market value for a takeover candidate. !or e"ample) N()with a current price of 62) might be offered over 1:: per sharein a takeover tender offer. +eneral stockholders would certainly

benefit from such an offer.

Finance Chapter 17

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