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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

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:

  1. a. The company contributed $1.5 million to the symphony orchestra in Birmingham, Alabama, its headquarters city.
  2. b. The company is spending 5500 million to open a new plant and expand operations in China. No profits will be produced by the Chinese 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 China.
  3. 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.

(a)

Summary Introduction

To identify: The view of stockholders in each of the given action and affect of given actions in the stock price.

Introduction:

Stockholder Wealth Maximization: The stockholders are the ultimate owner of the company and the management of the company should act on the behalf of stockholders. Stockholder wealth maximization means increasing the value of the firm’s stock value by properly utilizing the stockholders fund.

Explanation
  • The company has contributed $1.5 million from the social point view, it is a good deed which helps increase the goodwill of the firm. But the company’s shareholders will take it negatively.
  • As the shareholders are more concerned about the maximi...

(b)

Summary Introduction

To identify: The view of stockholders in each of the given action and affect of given actions in the stock price.

Introduction:

Stockholder Wealth Maximization: The stockholders are the ultimate owner of the company and the management of the company should act on the behalf of stockholders. Stockholder wealth maximization means increasing the value of the firm’s stock value by properly utilizing the stockholders fund.

(c)

Summary Introduction

To identify: The view of stockholders in each of the given action and affect of given actions in the stock price.

Introduction:

Stockholder Wealth Maximization: The stockholders are the ultimate owner of the company and the management of the company should act on the behalf of stockholders. Stockholder wealth maximization means increasing the value of the firm’s stock value by properly utilizing the stockholders fund.

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