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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

Take the following list of securities and arrange them in order of their priority of claims: (LO16-1)

Preferred stock Senior debenture

Subordinated debenture Senior secured debt

Common stock Junior secured debt

The Presley Corporation is about to go public. It currently has after-tax earnings of \(7,200,000, and 2,100,000 shares are owned by the present stockholders (the Presley family). The new public issue will represent 800,000 new shares. The new shares will be priced to the public at \)25 per share, with a 5 percent spread on the offering price. There will also be $260,000 in out-of-pocket costs to the corporation.

e. Determine what rate of return must be earned on the proceeds to the corporation so there will be a 5 percent increase in earnings per share during the year of going public.

Question: Barton Simpson, the chief financial officer of Broadband Inc. could hardly believe the change in interest rates that had taken place over the last few months. The interest rate on A2 rated bonds was now 6 percent. The $30 million, 15-year bond issue that his firm has outstanding was initially issued at 9 percent five years ago. Because interest rates had gone down so much, he was considering refunding the bond issue. The old issue had a call premium of 8 percent. The underwriting cost on the old issue had been 3 percent of par, and on the new issue it would be 5 percent of par. The tax rate would be 30 percent and a 4 percent discount rate would be applied for the refunding decision. The new bond would have a 10-year life. Before Barton used the 8 percent call provision to reacquire the old bonds, he wanted to make sure he could not buy them back cheaper in the open market.

c. Now do the standard bond refunding analysis as discussed in this chapter. Is the refunding financially feasible?

Question: Barton Simpson, the chief financial officer of Broadband Inc. could hardly believe the change in interest rates that had taken place over the last few months. The interest rate on A2 rated bonds was now 6 percent. The $30 million, 15-year bond issue that his firm has outstanding was initially issued at 9 percent five years ago. Because interest rates had gone down so much, he was considering refunding the bond issue. The old issue had a call premium of 8 percent. The underwriting cost on the old issue had been 3 percent of par, and on the new issue it would be 5 percent of par. The tax rate would be 30 percent and a 4 percent discount rate would be applied for the refunding decision. The new bond would have a 10-year life. Before Barton used the 8 percent call provision to reacquire the old bonds, he wanted to make sure he could not buy them back cheaper in the open market.

d. In terms of the refunding decision, how should Barton be influenced if he thinks interest rates might go down even more?

What are three forms of corporate securities discussed in the chapter?
See all solutions

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