1-9 The president of Southern Semiconductor Corporation (SSC) made this statement in the company’s annual report: “SSC’s primary goal is to increase the value of our common stockholders’ equity.” Later in the report, the following announcements were made:A. The company contributed $ 1.5 million to the symphony orchestra in Birmingham, Alabama, its headquarters city.B. The company is spending $ 500 million to open a new plant and expand operations in Spain. No profits will be produced by the Spanish operation for 4 years, so earnings will be depressed during this period versus what they would have been had the decision been made not to expand in Spain.C.The company holds about half of its assets in the form of U.S. Treasury bonds, and it keeps these funds available for use in emergencies. In the future, though, SSC plans to shift its emergency funds from Treasury bonds to common stocks.
Discuss how SSC’s stockholders might view each of these actions and how the actions might affect the stock price.
1-10 Investors generally can make one vote for each share of stock they hold. TIAA-CREF is the largest institutional shareholder in the United States. Therefore, it holds many shares and has more votes than any other organization. Traditionally, this fund has acted as a passive investor, just going along with management. However, in 1993, it mailed a notice to all 1,500 companies whose stocks it held that henceforth it planned to actively intervene if, in its opinion, management was not performing well. Its goal was to improve corporate performance to boost the prices of the stocks it held. It also wanted to encourage corporate boards to appoint a majority of independent (outside) directors, and it stated that it would vote against any directors of firms that “don’t have an effective, independent board that can challenge the CEO.”
In the past, TIAA-CREF responded to poor performance by “voting with its feet,” which means selling stocks that were not doing well. However, by 1993, that position had become difficult to maintain for two reasons. First, the fund invested a large part of its assets in “index funds,” which hold stocks in accordance with their percentage value in the broad stock market. Furthermore, TIAA-CREF owns such large blocks of stocks in many companies that if it tried to sell out, doing so would severely depress the prices of those stocks. Thus, TIAA-CREF is locked in to a large extent, which led to its decision to become a more active investor.
A. Is TIAA-CREF an ordinary shareholder? Explain.B. Due to its asset size, TIAA-CREF owns many shares in a number of companies. The fund’s management plans to vote those shares. However, TIAA-CREF is owned by many thousands of investors. Should the fund’s managers vote its shares, or should it pass those votes, on a pro rata basis, back to its own shareholders? Explain.
1-14. Bedrock Company has $ 70 million in debt and $ 30 million in equity. The debt matures in 1 year and has a 10% interest rate, so the company is promising to pay back $ 77 million to its debtholders 1 year from now.
The company is considering two possible investments, each of which will require an up-front cost of $100 million. Each investment will last for one year, and the payoff depends on the strength of the overall economy. There is a 50% chance that the economy will be weak and a 50% chance it will be strong.