The president of United Semiconductor Corporation made this statement in the company’s annual report: ‘‘United’s primary goal is to increase the value of the common stockholders’ equity over time.’’ Later on in the report, the following announcements were made:
a. The company contributed $1.5 million to the symphony orchestra in San Francisco, where it is headquartered.
b. The company is spending $500 million to open a new plant in Mexico. No revenues will be produced by the plant for four years, so earnings will be depressed during this period in comparison to earnings had the decision not been made to open the new plant.
c. The company is increasing its relative use of debt. Whereas assets were formerly financed with 35 percent debt and 65 percent equity, henceforth the financing mix will be 50-50.
d. The company uses a great deal of electricity in its manufacturing operations, and it generates most of this power itself. Plans are to use nuclear fuel rather than coal to produce electricity in the future.
e. The company has been paying out half of its earnings as dividends and retaining the other half. Henceforth, it will pay out only 30 percent as dividends. Discuss how United’s stockholders, customers, and labor force will react to each of these actions and then how each action might affect United’s stock price.