Chapter 1, Problem 1Q

What advantages does a company achieve when it possesses significant influence over another company through voting stock ownership?

To determine

Introduction: An investing entity is said to have a significant influence over other entities if it has the power to participate in the operational, financial, and policy decisions of the investee entity. If the investor has at least 20 percent voting right in the investee entity, the investor is presumed to have significant influence.

The advantages of possessing significant influence through voting stock ownership.

Answer to Problem 1Q

Significant influence through voting stock ownership gives the ability to participate in the strategic decision-making process in the investee corporation.

Explanation of Solution

Significant influence through voting stock ownership comes when an investor acquires a sufficient quantity of equity shares of the investee entity. Equity ownership provides the voting right and provides the privileges to elect members to the firm’s board of directors. The Board of directors are the highest authority in the management of the corporation, they are responsible for making strategic decisions, and setting company policies, further board is also responsible for hiring managers. Thus, the ability to appoint directors can be a powerful tool to influence the decision-making in the investee corporation.