Question

After successfully completing your corporate finance class, you feel the next challenge ahead is to serve on the board of directors of Schenkel Enterprises. Unfortunately, you will be the only person voting for you. Schenkel has 380,000 shares outstanding, and the stock currently sells for $41. Assume that Schenkel uses cumulative voting, and there are four seats in the current election. How much will it cost you to buy a seat? (Do not round intermediate calculations.)

Answer 1

If the company uses cumulative voting, you will need 1 / (N + 1) percent of the stock (plus one share) to guarantee election, where N is the number of seats up for election. So, the percentage of the company’s stock you need will be:

Percent of stock needed = 1 / (N + 1)

Percent of stock needed = 1 / (4 + 1)

Percent of stock needed = 0.20 or 20%

So, the number of shares you need to purchase is:

Number of shares to purchase = (380,000 × 0.20) + 1

Number of shares to purchase = 76,001

And the total cost to you will be the shares needed times the price per share, or:

Total cost = 76,001 × $41

Total cost = $3,116,041