Question

The president of ABC made this statement in the company’s annual report: “ABC’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 million to the symphony orchestra in Chicago, IL, its headquarters city.

b) The company is spending $800 million to open a new plant and expand operations in South Vietnam. No profits will be produced by the Vietnamese operation for four years, so earnings will be depressed during this period versus what they would have been had the decision not been made to expand in South Vietnam?

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, ABC plans to shift its emergency funds from Treasury bonds to common stocks.

Discuss how ABC’s stockholders might view each of these actions and how the actions might affect the stock price.

Answer 1

1.The company contributed $1 million to the symphony orchestra in Chicago, IL, its headquarters city.

a.Good publicity for company

b.Can get a tax write-off

c.Diversity of cultural attraction

d.Investment in community


2.The company is spending $800 million to open a new plant and expand operations in South Vietnam. No profits will be produced by the Vietnamese operation for four years, so earnings will be depressed during this period.

a.Stockholders care about long-term so its a good idea
b.Markets are expanding, stock prices will increase
c.Stock price is based upon Wall Street's forecast of the future of the company, not short-term earnings
hence,overall it is acceptable idea.

3.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, ABC plans to shift its emergency funds from Treasury bonds to common stocks.

-the future of the market cannot predicted precisely
- the emergency fund shouldn't risked
-hence it is overall bad idea and shall effect the companys primary goal.