Chapter 7 Stocks and Their Valuation a. A proxy is a document giving one person the authority to act for another, typically the power to vote shares of common stock. If earnings are poor and stockholders are dissatisfied, an outside group may solicit the proxies in an effort to overthrow management | Chapter 7 Stocks and Their Valuation ANSWERS TO END-OF-CHAPTER QUESTIONS 7-1 a. A proxy is a document giving one person the authority to act for another typically the power to vote shares of common stock. If earnings are poor and stockholders are dissatisfied an outside group may solicit the proxies in an effort to overthrow management and take control of the business known as a proxy fight. A takeover is an action whereby a person or group succeeds in ousting a firm s management and taking control of the company. The preemptive right gives the current shareholders the right to purchase any new shares issued in proportion to their current holdings. The preemptive right may or may not be required by state law. When granted the preemptive right enables current owners to maintain their proportionate share of ownership and control of the business. It also prevents the sale of shares at low prices to new stockholders which would dilute the value of the previously issued shares. Classified stock is sometimes created by a firm to meet special needs and circumstances. Generally when special classifications of stock are used one type is designated Class A another as Class B and so on. Class A might be entitled to receive dividends before dividends can be paid on Class B stock. Class B might have the exclusive right to vote. Founders shares are stock owned by the firm s founders that have sole voting rights but restricted dividends for a specified number of years. b. Some companies are so small that their common stocks are not actively traded they are owned by only a few people usually the companies managers. Such firms are said to be closely held corporations. In contrast the stocks of most larger companies are owned by a large number of investors most of whom are not active in management. Such companies are said to be publicly owned corporations. c. The secondary market deals with trading in previously issued or outstanding shares of established publicly owned companies. .
