Asked by Jasmine Hemingway on Apr 27, 2024
Verified
In which of the following circumstances is the investor most likely to exert significant influence over the operating and financial policies of the investee company?
A) The investor owns 48% of the investee's outstanding nonvoting preferred stock.
B) The investor owns 22% of the investee's outstanding common stock and one other investor owns the other 78%.
C) The investor owns 36% of the investee company's outstanding convertible bonds.
D) The investor owns 19% of the investee's outstanding common stock and has a seat on the investee's board of directors.
Significant Influence
The power to participate in the financial and operating policy decisions of an investee but not control or jointly control over those policies.
Voting Stock
Shares that give the shareholder voting rights in the corporation's decisions, typically in elections for the board of directors.
Convertible Bonds
Debt securities issued by a corporation that can be converted into a specified number of shares of the corporation's stock at the option of the bondholder, typically at certain times during the bond's life.
- Identify the circumstances under which an investor can exert significant influence over an investee.
Verified Answer
RM
Rylea MarcumApr 30, 2024
Final Answer :
D
Explanation :
Owning 19% of the outstanding common stock and having a seat on the board of directors would give the investor significant influence over the operating and financial policies of the investee company. While owning a large percentage of nonvoting preferred stock (A) or convertible bonds (C) may provide some influence, they do not typically come with voting rights or representation on the board of directors. Owning only 22% of the common stock and sharing ownership with another investor (B) would not provide significant influence compared to having representation on the board.
Learning Objectives
- Identify the circumstances under which an investor can exert significant influence over an investee.