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27 Nov 2019

A) will result in higher dividends per share.
B) allows managers to buy additional shares below the currentmarket price.
C) is included in every corporate charter.
D) protects the current shareholders against a dilution of theirownership interests.
E) protects bondholders, and thus enables the firm to issue debtwith a relatively low interest rate.

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True or False

5. The corporate valuation model can be used only when a company doesn’t pay dividends.

6. From an investor’s perspective, a firm’s preferred stock is generally considered to be less risky than its common stock but more risky than its bonds. However, from a corporate issuer’s standpoint, these risk relationships are reversed: bonds are the most risky for the firm, preferred is next, and common is least risky.

7. The preemptive right is important to shareholders because it protects the current shareholders against a dilution of their ownership interests.

How can bondholders protect themselves against a firm issuing additional debt to fund a payout to stockholders?

Q)Suppose the Alpha Manufacturing Corporation is experiencing extreme financial difficulties and is considering bankruptcy. Its shareholders are currently almost equally divided about whether or not the company should go bankrupt, with one outspoken faction pushing for bankruptcy and the other strongly opposing it. They have $50 million in debt all in the form of bonds, and bondholders are pretty well united in that they want the firm to declare bankruptcy.

A)The CEO announces that he is leaning against bankruptcy. This means one faction of shareholders is happy, but another faction of shareholders is very upset and the bondholders are also unhappy. Can the unhappy faction of shareholders team up with the bondholders to vote out the CEO? Explain your reasoning using references from the background readings.

B) Suppose Alpha ends up declaring bankruptcy. They do not have any cash in the bank but they own $60 million worth of real estate. They only have one type of shareholder—common shareholders. If they sell the real estate, how much of this will bondholders get and how much with shareholders get?

C)Now suppose that Alpha has two classes of shareholders—common shareholders and preferred shareholders. Preferred shareholders are owed $20 million in dividends that have been unpaid in the last two years. If Alpha goes bankrupt and sells its $60 million worth of real estate, how much will bondholders get, how much will common shareholders get, and how much will preferred shareholders get?

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