Benefits of common stock and preferred stock, Financial Accounting

Evaluate the following statements, and explain why you agree or disagree.

(a)    In a recent interview, a Wall Street investment banker commented on the infrequent use of Preferred Stock by many companies: "I believe Preferred Stock is an underutilized form of financing: it provides relatively stable income, and Cumulative Preferred Stock pays dividends ahead of Common Stock, both of which investors like. As a consequence investors will accept lower returns on Preferred Stock than on Common Stock. More CFOs ought to take advantage of this benefit and issue Preferred instead of Common Stock."

(b)   The following are arguments proposed for why firms might be able to use more or less debt in their capital structure. First, firms that have more assets such as land and building, which can serve as collateral for borrowing, have more debt capacity. Second, firms that have more stable profits and cash flows have lower debt capacities. Third, firms with sales that are impacted very negatively if the firm approaches financial distress (because customers also expect the firm to be around to fulfill after-sales warranties) have higher debt capacity.

(c)    As debt increases in the firm's capital structure, the debt will become more risky. At the same time, equity will also become more risky. Given that both sets of investors bear more risk, it must be the case that the firm's asset beta also increases with leverage.




Posted Date: 2/28/2013 12:15:51 AM | Location : United States

Related Discussions:- Benefits of common stock and preferred stock, Assignment Help, Ask Question on Benefits of common stock and preferred stock, Get Answer, Expert's Help, Benefits of common stock and preferred stock Discussions

Write discussion on Benefits of common stock and preferred stock
Your posts are moderated
Related Questions
Zoum Corporation had the following transactions during 2014: 1. Issued $125,000 of par value common stock for cash. 2. Recorded and paid wages expense of $60,000. 3. Acquired land

equity share capital rs 10 200 10% preference share capital 80 15% debenture 20 profit before interest and taxes 60 proposed dividend 20 provision fo

SECRET TRUSTS The initial basis of the doctrine of secret trusts was the refusal of equity to permit a statute to be used as an engine of fraud (e.g. Bannister v Bannister).  Cer

Completed executions A judgement creditor cannot retain the "benefit" of an execution or attachment, unless he has completed it- Before the date of the receiving order,

SEC reporting implications i) Potentially inaccurate reporting of executive compensation in proxy statements and annual reports ii) Potential violation of securities and Law

Q. Which one of the following is not necessary in order for a corporation to pay a cash dividend? a. Adequate cash b. Approval of stockholders c. Declaration of dividends by the bo

Heathrow issues $2,000,000 of 6%, 15-year bonds dated January 1, 2011, that pay interest semiannually on June 30 and December 31. The bonds are issued at a price of $2,447,990.

Ace Company has a 30 percent marginal tax rate and uses a 12% discount rate to compute NPV. The firm started a venture that will yield the following before-tax cash flows: year 0,

A 15-year, 14% semiannual coupon bond with a par value of $1,000 may be known as in 4 years at a call price of $1,075. The bond sells for $1,050. (Suppose that the bond has just be

Define Case Study of A Company that exports goods? A company exports goods to country K. Your work as an international cash manager needs you to estimate the value of country K