Reference no: EM132616114

Common stock (or ordinary share) is a security that represents ownership in a corporation. Holders of common stock elect the board of directors and vote on corporate policies. In most cases, common stocks have equal voting rights. However, some companies have more than of common stock, and often the classes are created with unequal voting rights, also known as weighted voting rights. For example, of stock (say Class A) has multiple votes per share while the other class of stock (say Class B) has one vote per share.

Problem (a) Explain why new economy technology stocks (e.g. Xiaomi Corporation or Meituan Dianping) tend to issue class of common stock with weighted voting rights.

Problem (b) Given the disadvantage in voting rights, suggest two reasons why minority shareholders (those holding common stock with one vote per share) still invest in this type of companies.

Problem (c) Critique two negative impacts of this class of common stock with weighted voting rights to the market.

Problem (d) E and W are dividend paying stocks in the same industry. Only W has weighted voting rights. Consensus forecast expects similar dividends in the next five years. Based on the dividend based valuation model, discuss whether there is any difference in the equity value of E and W.