The Ward Co. has 500,000 shares of stock outstanding with a market price of $37.

Question

The Ward Co. has 500,000 shares of stock outstanding with a market price of $37.59 a share. The company has three open positions on their board of directors. You want to assure yourself of winning one of those seats assuming that no one else votes for you. The company uses cumulative voting. How much will it cost you to purchase sufficient shares to ensure your election assuming that you currently do not own any shares? Hardware, Inc. recently announced their annual dividend will be increasing to $3.15 a share for next year with annual increases in the dividend amount of 1.15 percent thereafter. You require a 13.5 percent rate of return on this relatively risky security. How much are you willing to pay for one share of this stock? Dividends become a liability of a corporation:

Explanation / Answer

8 In cumulative voting each share can vote for each open Director positions So in this case each Director can get Max 500,000 votes   To ensure win I need to get 500,000 votes as no one else will vote for me. Each share can vote 3 imes as there are 3 open position for Directors. So I need to purchase 500,000/3 plus one share to ensure win So required no of shares =           166,668 Price of each share = 37.59 Total price of share purchase = $   6,265,038 So I need to spend $6,265,038 to purchase shares to win the election. Option d. is correct. 9 Next year dividend =d0= 3.15 dividend growth rate 1.15% Required return rate 13.50% By Goedon's formula Stock price next year will be P0=d0*(1+g)/(k-g) =3.15*1.0115/(0.135-0.0115)                           = 25.80 Total of share price+dividend next year $            28.95 Required return rate 13.50% Share Price now =28.95/1.135 = $            25.51 So I am willing to $25.51 for one share of this stock option a. is correct 10 Dividends become liability of a corporation once it is   declared to be payable by Board. So Option c. is correct.

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