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A) The president of ABC made this statement in the firm's annual report: "ABC's primary goal is to increase the value of our common stockholders' equity." Later in the report, the following announcements were made:

1. The firm contributed $1.4 million to the symphony orchestra.

2. The firm is spending $600 million to open a new plant and expand operations in Middle East. No profits will be produced by the Middle East operation for 4 years, so earnings will be depressed during this period versus what they would have been had the decision not been made to expand in that maket.

Discuss how ABC's stockholders might view each of these actions, and how the actions might affect the stock price.

B) Eskimo Enterprises recently made a huge investment to upgrade its technology. While these improvements won't have much of an impact on performance in the short term, they are anticipated to reduce future costs exponentially. What impact will this investment have on Eskimo Enterprises' earnings per share this year? What impact might this investment have on the firm's intrinsic value and stock price?

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Solution Summary

ABC's stockholders view and possible effect to the stock price; Eskimo Enterprises

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A)

The contribution to symphony orchestra can be viewed differently under different circumstances. For example, if the ABC Company has a business related to music, entertainment or any other area that complements Symphony orchestra's core focus, such an investment might by justified by the company's management to the shareholders as a PR or marketing effort in order to enhance corporate image. The impact can be positive for the shareholders. For the stock price, it might constitute as a positive or no-event as the investors and shareholders might take it either positive or might ignore it completely as a no event.

However, if ABC's core business is nowhere related to music and entertainment or any other aspect of Symphony orchestra's area of work, such a contribution might ...

Solution provided by:
Sheetal Jain, PGDM
Education
  • BComm, University of Delhi
  • Post Graduate Diploma in Management (Equivalent to MBA), All India Management Association
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