John Smith is a wealthy activist investor who has a healthy interest in seeing companies in which he has an interest performs well. In general, he is more concerned about maintaining control over the companies he invests in (by having a majority of voting rights) than he is about the cash flows generated for him personally. Mr. Smith has investments in the following companies. Alpha Co. is a large agricultural firm with a market cap of $225 million. The company has two classes of shares, where Class A shares provide 10 votes and Class B shares only 1, even though the cash flow rights are the same for both classes of shares. The company has issued 3 million Class A shares and 12 million Class B shares. As a cofounder of this company, Mr. Smith has a significant stake in it as he owns 60% of the Class A shares and 26% of the Class B shares. (Assume that both classes of shares trade at the same price.) Bravo Corp. is a beverage producer (natural fruit juices, mineral water, and several varieties of beer). The company has a market cap of $360 million and has 20 million shares outstanding. Alpha Co. owns a 42% stake in Bravo Corp. and Mr. Smith has a direct investment of 9% in the company. Charlie Inc. is a low-cost distributor of grocery items and a major buyer of Bravo Corp.’s products. Charlie Inc.’s equity is valued at $700 million and there are 28 million shares outstanding. Direct investors in the distribution firm include Alpha Co. (10%), Bravo Corp. (40%), and Mr. Smith (1%). Questions: What is Mr. Smith’s total dollar investment in Alpha Co.? What percentage of the company does Mr. Smith control through his voting rights? If the company paid a dividend to its shareholders, what percentage would Mr. Smith receive as a result of his cash flow rights?
Total dollar investment in Alpha Co. =
Percentage of control rights =
Percentage of cash flow rights =