Chapter 5: Q3DQ (page 564)

What is the purpose of cumulative voting? Are there any disadvantages to management?

Short Answer

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The cumulative voting is implemented for providing power to minority shareholders and this can be disadvantageous to the management as now they will have to ensure that the interests of all shareholders are met as even minority shareholders can overthrow the directors.

Step by step solution

Step 1:Purpose of cumulative voting

Cumulative voting is a method of voting that allows a proportional representation of shareholders.This voting system is implemented to ensure that even the minority shareholders have a say in the election of the company’s board of directors.

Step 2:The disadvantage of cumulative voting to management

The cumulative voting can be disadvantageous for the management as this voting method allows even the minority shareholders to elect a director. This will ensure that the management will have to ensure that the interests of all shareholders are satisfied and not only of large shareholders.

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In \( millions		In \) millions
Current assets	\(70	Current liabilities	\)30
Fixed assets	\(70	Long-term liabilities	\)30
		Total liabilities	\(60
		Stockholder’s equity	\)80
Total assets	\(140	Total stockholder’s equity and liabilities	\)140

Assets
	Book value	Liquidation value
Accounts receivables	\(1,400,000	\)1,200,000
Inventory	\(1,800,000	\)900,000
Machinery and equipment	\(1,100,000	\)600,000
Building and plant	\(4,200,000	\)2,500,000
Total assets	\(8,500,000	\)5,200,000

Liabilities and stockholder’s claims
Liabilities
Accounts payable	\(2,800,000
First lien, secured by machinery and equipment	\)900,000
Senior unsecured debt	\(2,200,000
Subordinated debenture	\)1,700,000
Total liabilities	\(7,600,000
Stockholder’s claims
Preferred stock	\)250,000
Common stock	\(650,000
Total stockholder’s claims	\)900,000
Total liabilities and stockholder’s claims	$8,500,000

What is the purpose of cumulative voting? Are there any disadvantages to management?

Short Answer

Step by step solution

Step 1:Purpose of cumulative voting

Step 2:The disadvantage of cumulative voting to management

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