John Smith is a wealthy activist investor who has a healthy interest in seeing companies in which he has an interest perform 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 (direct) dollar investment in Bravo Corp.?
What percentage of the company does Mr. Smith control through his voting rights (both directly and indirectly)?
If the company paid a dividend to its shareholders, what percentage would Mr. Smith receive as a result of his cash flow rights (both directly and indirectly)?