Southern Semiconductor Corporation (SSC)
MINI CASE STUDY
Possible Points: 5
Loren Seguara and Dale Johnson both work for Southern Semiconductor Corporation (SSC), a
major producer of computer components. Loren works as a clerical assistant in the Accounting
Department, and Dale works as a packager in the Shipping Department. During their lunch
break one day, they began talking about the company. Dale complained that he had always
worked hard trying not to waste packing materials and efficiently and cost-effectively
performing his job. In spite of his efforts and those of his co-workers in the department, the
firm’s stock price had declined nearly $2.00 per share over the past nine months. Loren
indicated that he shared Dale’s frustration, particularly because the firm’s profits had been rising.
Neither could understand why the firm’s stock price was falling as profits rose.
Loren indicated that he had seen documents describing the firm’s profit-sharing plan under
which all managers were partially compensated on the basis of the firm’s profits. He suggested
that maybe it was profit that was important to management, because it directly affected their pay.
Dale said, “That doesn’t make sense, because the stockholders own the firm. Shouldn’t
management do what’s best for stockholders? Something’s wrong!” Loren responded, “Well,
maybe that explains why the company hasn’t concerned itself with the stock price. Look, the
only profits that stockholders receive are in the form of cash dividends, and this firm has never
paid dividends during its 20-year history. We as stockholders therefore don’t directly benefit
from profits. The only way we benefit is for the stock price to rise.” Dale chimed in, “That
probably explains why the firm is being sued by state and federal environmental officials for
dumping pollutants in the adjacent stream. Why spend money for pollution control? It increases
costs, lowers profits, and therefore lowers management’s earnings!”
Loren and Dale realized that the lunch break had ended and they must quickly return to work.
Before leaving, they decided to meet the next day to continue their discussion.
Please answer the following questions:
1) What should the management of Southern Semiconductor Corporation pursue as its
overriding goal? Why?
2) Does the firm appear to have an “agency problem?” Explain.
3) Evaluate the firm’s approach to pollution control. Does it seem to be ethical?
a. Why might incurring the expense to control pollution be in the best interests of the firm’s
owners despite its negative effect on profits?
4) Does the firm appear to have an effective “corporate governance structure?” Explain any
5) On the basis of the information provided, what specific recommendations would you offer the
ALLIANCE STOCK FUND ANALYSIS
Mini Case Study
A recent inheritance from your late uncle’s estate has provided you with funds available for
investment. You have been provided with the following information for three stocks: Stocks X,
Y, and Z.
The returns on the three stocks are positively correlated, but they are not perfectly correlated.
(I.e., each of the correlation coefficients is between 0 and 1.0.) There are two diversified stock
funds available into which you could invest your inheritance funds:
Fund P has thirty percent of its funds (30%) invested in Stock X and seventy percent
(70%) invested in Stock Y.
Fund Q has one-third (33.33%) of its funds invested in each of the three stocks.
The risk-free rate (R F ) is 3.5%, and the market is in equilibrium. (I.e., the required returns
equal the expected returns.) The market average rate of return ( r m ) is 8%.
1. What is the portfolio beta for each of the available stock funds?
a. Fund P:
b. Fund Q:
2. What is the generic equation for the Security Market Line (SML) that would apply to all
publicly-traded stock shares, using the numerical values given for the risk-free rate ( R F ) and
the market average rate of return ( r m ) that are provided in the case study above?
3. Using the Security Market Line (SML) equation that you developed in Question #2 above,
calculate the required rate of return on each of the available stock funds:
a. Fund P:
b. Fund Q:
4. Based on your calculations, which stock fund appears to be most risky? Why?
5. Into which fund would you invest your inheritance funds? Why?
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