Financial Management Essay

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Question 1: The president of Southern Semiconductor Corporation (SSC) made this statement in the company’s annual report: “SSC’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 $1.5 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 been made not to expand in China. 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 bonds to common stocks. Discuss how SSC’s stockholders might view each of these actions and how the actions might affect the stock price. Question 2: Investors generally can make one vote for each share of stock they hold. TIAA-CREF is the largest institutional shareholder in the United States; therefore, it holds many shares and has more votes than any other organization. Traditionally, this fund has acted as a passive investor, just going along with management. However, in 1993, it mailed a notice to all 1,500 companies whose stocks it held that henceforth, it planned to actively intervene if, in its opinion, management was not performing well. Its goal was to improve corporate performance to boost the prices of the stocks it held. It also wanted to encourage corporate boards to appoint a majority of independent (outside) directors; and it stated that it would vote against any directors of firms that “don’t have an effective, independent board that can challenge the CEO.”

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