The president of International Microchips Inc. (IMI) made this statement in the company’s annual report: “IMI’s primary goal is to increase the value of the common stockholders’ equity over time.” Later in the report, the following announcements were made. Discuss how IMI’s stockholders, customers, and labor force would react to each of these actions and how each action might affect IMI’s stock price.
a. The company contributed $2 million to the symphony orchestra in Seattle, its headquarters city.
b. The company is spending $600 million to open a new plant in Venezuela. No revenues will be produced by the plant for 4 years, so earnings will be depressed during this period versus what they would have been had the decision not been made to open the new plant.
c. The company is increasing its relative use of debt. Assets were formerly financed with 30 percent debt and 70 percent equity; henceforth the financing mix will be 45/55.
d. The company uses a great deal of electricity in its manufacturing operations, and it generates most of this power itself. Plans are to utilize nuclear fuel rather than coal to produce electricity in the future.
e. The company has been paying out half of its earnings as dividends and retaining the other half. Henceforth, it will pay out only 40 percent as dividends.