Decision-Making Across the Organization At the beginning of the question-and-ans

Question

Decision-Making Across the Organization At the beginning of the question-and-answer portion of the annual stockholders' meeting of Neosho Corporation, stockholder John Linton asks, "Why did management sell the holdings in JMB Company at a loss when this company has been very profitable during the period Neosho held its stock?" Since president Tony Cedeno has just concluded his speech on the recent success and bright future of Neosho, he is taken aback by this question and responds, "I remember we paid $1,300,000 for that stock some years ago. I am sure we sold that stock at a much higher price. You must be mistaken." Linton retorts, "Well, right here in footnote number 7 to the annual report it shows that 240,000 shares, a 30% interest in JMB, were sold on the last day of the year. Also, it states that JMB earned $520,000 this year and paid out $160,000 in cash dividends. Further, a summary statement indicates that in past years, while Neosho held JMB stock, JMB earned $1,240,000 and paid out $440,000 in dividends. Finally, the income statement for this year shows a loss on the sale of JMB stock of $180,000. So, I doubt that I am mistaken." Red-faced, president Cedeno turns to you. Instructions With the class divided into groups, answer the following. What dollar amount did Neosho receive upon the sale of the JMB stock? Explain why both stockholder Linton and president Cedeno are correct.

Explanation / Answer

b.   

Here, both the Stockholder Linton & President Cedeno are correct.

Linton is correct. Consistently over the years, JMB Stock has been giving cash dividends to the shareholders. Hence, it makes sense to hold on to the stock. Also, considering this scenario, it doesn’t look feasible to sell the stock at the loss too.

At the same time, President Cedeno is also correct. It is due to the fact that in comparison to the earnings of JMB, it is releasing just a small portion to the shareholders. For instance, This Year, Out of the earnings of $ 520000, it is paying just 160000 which is just 30% and retaining staggering 70% with itself which is lesser than even 35% which it had been paying in earlier. Hence, retaining funds in those stock was not feasible as it was attracting lesser returns which could have been used elsewhere more profitably.

Amount Intially Paid for JMB Shares 1300000 Total Number of Shares Acquired 240000 Per Share Price (1300000/240000) 5.42 a. Dollar Amount Neosho Received Upon the Sale of JMB Stock - $ 1120000

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