The president of Southern Semiconductor Corporation (SSC) made this statement in
ID: 2678793 • Letter: T
Question
The president of Southern Semiconductor Corporation (SSC) made this statement in the companys annual report. SSCs 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 $1.5 million to the symphony orchestra in Birmingham, Alabama, its headquarters city
b. The company is spending $500 million to open a new plant and expand operations in china. No profits will be produced by the chinese operation for 4 years, so earnings will be depressed during this period versus what they would have been had the decision not been made to expand in that marked.
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, SSC plans to shift its emergency funds from Treasury bond to common stocks.
Discuss how SSCs stockholders will view each of these actions, and how they will affect the stock price.
Explanation / Answer
b: a.Companies must make investments in the current period in order togenerate future cash flows. Stockholders should be aware of this, andassuming a correct analysis has been performed, they should react positivelyto the decision. Assuming that the correct capital budgeting analysis has beenmade, the stock price should increase in the future. c U.S. Treasury bonds are considered safe investments, while common stock are far more risky. If the company were to switch the emergency funds fromTreasury bonds to stocks, stockholders should see this as increasing the firm’srisk because stock returns are not guaranteed—sometimes they go up andsometimes they go down. The firm might need the funds when the prices of their investments were low and not have the needed emergency funds.Consequently, the firm’s stock price would probably fall
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