Chapter 17-18 Testable Questions

Why has corporate management become increasingly sensitive to the desires of large institutional investors?
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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.
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 far in excess of their proportionate ownership.
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 rights and claim to earnings cannot be diluted without their consent
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 the firm, the poison pill allows current stockholders to acquire additional shares at a very low price. This increases the number of shares outstanding and makes it more difficult for the potential acquiring company to successfully complete the merger.
What is the most likely explanation for the use of preferred stock from a corporate viewpoint?
Most corporations that issue preferred stock do so to achieve a balance in their capital structure. It is a means of expanding the capital base of the firm without diluting the common stock ownership position or incurring contractual debt obligations.
Why is the cumulative feature of preferred stock particularly important to preferred stockholders?
With the cumulative feature, if preferred stock dividends are not paid in any one year, they accumulate and must be paid in total before common stockholders can receive dividends. Even though preferred stock dividends are not a contractual obligation as is true of interest on debt, the cumulative feature tends to make corporations very aware of obligations to preferred stockholders. Preferred stockholders may even receive new securities for forgiveness of missed dividend payments.
Explain the relationship between a company's growth possibilities and its dividend policy.
The greater a company's growth opportunities, the more funds that can be justified for profitable internal reinvestment. Following the life cycle from development to growth to expansion to decline, the dividends typically shift from no to low to moderate to high.
If you buy stock on the ex-dividend date, will you receive the upcoming quarterly dividend?
No, the old stockholder receives the upcoming quarterly dividend. If you continue to hold the stock, you will receive the next dividend.
Why might a stock dividend or a stock split be of limited value to an investor?
The asset base remains the same and the stockholders' proportionate interest is unchanged. EPS will go down by the exact proportion that the number of shares increases. The only circumstances in which a stock dividend may be of some usefulness and perhaps increase value is when dividends per share remain constant and total dividends go up, or where substantial information is provided about the growth of the company.
Does it make sense for a corporation to repurchase its own stock? Explain.
A corporation can make a rational case for purchasing its own stock as an alternative to a cash dividend policy. Earnings per share will go up as the shares decline, so the stockholder will receive the same dollar benefit as if a cash dividend was paid. Because the benefits are in the format of capital gains the tax may be deferred until the stock is sold.