At the beginning of the question-and-answer portion of the annual shareholder’s meeting of Kemper Ltd., shareholder Mike Kerwin asks, “Why did management sell the holdings in UMW Company at a loss when this company has been very profitable during the period Kemper held its shares?” Since President Tony Chavez has just concluded his speech on the recent success and bright future of Kemper, he is taken aback by this question and responds, “I remember we paid £1,300,000 for those shares some years ago. I am sure we sold these shares at a much higher price. You must be mistaken.” Kervin retorts, “Well, right here in footnote number 7 to the annual report it shows that 240,000 shares, a 30% interest in UMW, were sold on the last day of the year. Also, it states that UMW earned £520,000 this year and paid out £160,000 in cash dividends. Further, a summary statement indicates that in past years, while Kemper held UMW shares, UMW earned £1,240,000 and paid out £440,000 in dividends. Finally, the income statement for this year shows a loss on the scale of UMW shares of £180,000. So I doubt that I am mistaken.” Red-faced, president Chavez turns to you. Questions: a. What amount (in pounds) did Kemper received upon the sale of the UMW shares? b. Explain why both shareholder Kerwin and president Chavez are correct.
At the beginning of the question-and-answer portion of the annual shareholder’s meeting of Kemper Ltd., shareholder Mike Kerwin asks, “Why did management sell the holdings in UMW Company at a loss when this company has been very profitable during the period Kemper held its shares?”
Since President Tony Chavez has just concluded his speech on the recent success and bright future of Kemper, he is taken aback by this question and responds, “I remember we paid £1,300,000 for those shares some years ago. I am sure we sold these shares at a much higher price. You must be mistaken.”
Kervin retorts, “Well, right here in footnote number 7 to the annual report it shows that 240,000 shares, a 30% interest in UMW, were sold on the last day of the year. Also, it states that UMW earned £520,000 this year and paid out £160,000 in cash dividends. Further, a summary statement indicates that in past years, while Kemper held UMW shares, UMW earned £1,240,000 and paid out £440,000 in dividends. Finally, the income statement for this year shows a loss on the scale of UMW shares of £180,000. So I doubt that I am mistaken.”
Red-faced, president Chavez turns to you.
Questions:
a. What amount (in pounds) did Kemper received upon the sale of the UMW shares?
b. Explain why both shareholder Kerwin and president Chavez are correct.
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