Fundamentals of Financial Management (MindTap Course List)
14th Edition
ISBN: 9781285867977
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Textbook Question
Chapter 21, Problem 4Q
In the spring of 1984, Disney Productions' stock was selling for about $3.125 per share. (All prices have been adjusted for 4-for-l splits in 1986 and 1992.) Then Saul Steinberg, a New York financier, began acquiring it; after he had 12%, he announced a tender offer for another 37% of the stock—which would bring his holdings up to 49%—at a price of $4.22 per share. Disney's management then announced plans to buy Gibson Greeting Cards and Arvida Corporation, paying for them with stock. It also lined up bank credit and (according to Steinberg) was prepared to borrow up to $2 billion and use the funds to repurchase shares at a higher price than Steinberg was offering. All of these efforts were designed to keep Steinberg from taking control. In June, Disney's management agreed to pay Steinberg $4.84 per share, which gave him a gain of about $60 million on a 2-month investment of about $26.5 million.
When Disney's buyback of Steinberg's shares was announced, the stock price fell almost instantly from $4.25 to $2.875. Many Disney stockholders were irate, and they sued to block the buyout. Also, the Disney affair added fuel to the fire in a congressional committee that was holding hearings on proposed legislation that would (1) prohibit someone from acquiring more than 10% of a firm's stock without making a tender offer for all the remaining shares; (2) prohibit poison pill tactics such as those Disney's management had used to fight off Steinberg; (3) prohibit buybacks, such as the deal eventually offered to Steinberg, (greenmail) unless there was an approving vote by stockholders; and (4) prohibit (or substantially curtail) the use of golden parachutes (the one thing Disney's management did not try).
Set forth the arguments for and against this type of legislation. What provisions, if any, should it contain? Also, look up Disney's current stock price to see how its stockholders have fared. Note that Disney's stock was split 3-for-l in July 1998.
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The Windsor Corporation has 120,000 shares outstanding with a current market price of $8.10 per
share. The company needs to raise an additional $36,000 to finance new expenditures, and has
decided on a rights issue. The issue will allow current stockholders to purchase one additional
share for 20 rights at a subscription price of $6
per
share.
a) How many new shares must be issued?
b) What will be the ex-rights stock price?
c) If the ex-rights price were set at $7.90, would you as a potential new stockholder choose to
buy shares ex-rights or buy shares at the old price and exercise your rights?
d) Suppose that the company was also considering structuring the rights issue to allow for an
additional share to be purchased for 10 rights at a subscription price of $3. Prove that a
stockholder with 100 shares would be indifferent between purchasing a new share for 10
rights at $3 or purchasing a new share for 20 rights at $6.
e) Why do you think the company chose a rights issue rather than a…
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