Chapter 17-18 Testable Questions

Why has corporate management become increasingly sensitive to the desires of large institutional investors?
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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.
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.
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.
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.