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Chapter 5: Q1DQ (page 564)

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

Short Answer

Expert verified

The institutional investors have a substantial percentage of shares in the company and they can take over the management, so the corporate management ensures that these investors are satisfied.

Step by step solution

01

Step 1:Meaning of corporate management

Corporate management refers to the management of a company.Corporate management is concerned with administrating, leading, and directing the company towards achieving its objectives.

02

Step 2:The reason for sensitivity of the corporate management with institutional investors

The institutional investors own a substantial percentage of the company鈥檚 shares and can use their power to remove the management. Therefore, the corporate management ensures that the institutional investors are happy.

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Most popular questions from this chapter

Discuss how an underwriting syndicate decreases risk for each underwriter and at the same time facilitates the distribution process.

Question: I. B. Michaels has a chance to participate in a new public offering by Hi-Tech Micro Computers. His broker informs him that demand for the 700,000 shares to be issued is very strong. His broker鈥檚 firm is assigned 25,000 shares in the distribution and will allow Michaels, a relatively good customer, 1.3 percent of its 25,000 share allocation. The initial offering price is \(30 per share. There is a strong aftermarket, and the stock goes to \)32 one week after issue. The first full month after issue, Mr. Michaels is pleased to observe his shares are selling for \(33.50. He is content to place his shares in a lockbox and eventually use their anticipated increased value to help send his son to college many years in the future. However, one year after the distribution, he looks up the shares in The Wall Street Journal and finds they are trading at \)28.50.

c. Why might a new public issue be expected to have a strong aftermarket?

Question:Twenty-five-year B-rated bonds of Parker Optical Company were initially issued at a 12 percent yield. After 10 years the bonds have been upgraded to Aa2. Such bonds are currently yielding 10 percent to maturity. Use Table 16-2 to determine the price of the bonds with 15 years remaining to maturity. (You do not need the bond ratings to enter the table; just use the basic facts of the problem.)

The Hastings Sugar Corporation has the following pattern of net income each year and associated capital expenditure projects. The firm can earn a higher return on the projects than the stockholders could earn if the funds were paid out in the form of dividends.

Year

Net income

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1

\(14 million

\)7 million

2

\(16 million

\)11 million

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4

\(16 million

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5

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The Hastings Corporation has 3 million shares outstanding. (The following questions are separate from each other.)

a. If the marginal principle of retained earnings is applied, how much in total cash dividends will be paid over the five years?

b. If the firm simply uses a payout ratio of 30 percent of net income, how much in total cash dividends will be paid?

c. If the firm pays a 10 percent stock dividend in years 2 through 5, and also pays a cash dividend of $3.40 per share for each of the five years, how much in total dividends will be paid?

d. Assume the payout ratio in each year is to be 20 percent of the net income and the firm will pay a 10 percent stock dividend in years 2 through 5, how much will dividends per share for each year be? (Assume the cash dividend is paid after the stock dividend.)

Solar Energy Corp. has $4million in earnings with 4 million shares outstanding. Investment bankers think the stock can justify P/E ratio of 21. Assume the underwriting spread is 5 percent. What should the price to the public be?

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